Two-side market in Forex business or even in most financial markets of the world is a normal and proven thing. It is not surprising that you can profit from both buying and selling in the same market.
To fully understand this issue, please stay with us at the end of this article.
In this article we will explore:
- What is the two-sided forex market?
- Exchange rate parity
- Two-sided market in forex using currency parity
- Types of two-sided market transactions in Forex
- Purchase transactions in the two-sided forex market
- Sales transactions in the two-sided forex market
- Important points in trading in the two-sided forex market
- Advantages of the two-sided forex market
What is the two-sided forex market?
In two-sided markets, there is a feature for traders to make a profit either through buying or selling in rising or falling markets if analyzed correctly.
In contrast to two-sided markets, there are one-side markets, such as the Stock Exchange. In one-side markets, you will make a profit when the share you buy increases in value, and with this increase in price, you will make a profit.
Example for one-side market
Suppose you buy the shares of a petrochemical company at the price of 100 dollars, you will only profit when the value of this share is more than 100 dollars.
But if you predict that the value of the same share is going to decrease from 100 dollars to 80 dollars, you cannot profit from that share by asking to sell because the market is one-sided.
Example for two-sided market
Suppose you predict that the price of gold will increase from $2,000 to $2,050 in the financial markets such as Forex. Well, you can buy it and settle it when it reaches the desired price and collect your profit.
Now suppose that in the price of 2050, your prediction and analysis is that the price will return to 2000 dollars.
In the two-way market, you can also profit from this price reduction, and with a sale transaction, if you analyze it correctly, you will make a profit.
Don’t be surprised, the two-sided forex market has been and will be for a long time, the reason is very simple. Have you ever come across the term parity rate?
In fact, the reason why you can profit from the two-sided market in forex is the currency parity rate.
Exchange rate parity
Exchange rate refers to the value of one unit against another. For example, if the exchange rate of the GBP/USD pair is equal to 1.3715, it means that each British pound is equal to 1.3715 dollars.
Similarly, if the exchange rate of the EUR/USD pair is equal to 1.1857, it means that each euro is equal to 1.1857 US dollars.
In fact, the exchange rate is constantly changing and is not a fixed number.
The exchange rate is a dynamic and changing phenomenon that affects the economy of each country and trade relations between countries.
The exchange rate shows the value of one currency compared to another currency. This rate is typically determined by the currency markets and is influenced by many factors, including macroeconomics, monetary and fiscal policies, inflation rates, interest rates, government policies, supply and demand for aspirations, and global events such as changes in markets, world, political changes and wars.
Changes in exchange rates affect the economy of a country. In fact, the service rate determines the price of goods as well as the process of international trade.
If the currency of a country decreases compared to other currencies, the goods of that country can increase in global competition in the world markets. But if it increases, goods and service rates will become more expensive and domestic competition will be weaker.
When the value of the national currency decreases and the inflation rate is high, the exchange rate usually decreases.
This makes people look to buy currency to maintain their values. This in turn devalues the national currency and increases the inflation rate. Therefore, determining the currency becomes a complicated process that requires careful analysis and consideration of multiple factors.
Central banks also play an important role in dealing with evaluation. They can buy and sell currency and apply monetary policies and have financial effects on the price of currency.
These central banks usually take place in order to maintain the establishment of the value of the national currency, control inflation and trade in the currency markets.
Finally, it should be noted that it changes daily and even hourly and its analysis is very complicated. International currency markets are dynamic and have multiple effects on exchange rates.
Therefore, it is useful for any person who is interested in the markets to look at the analysis and news of the factors that make decisions based on their evaluations.
Two-sided market in forex using currency parity
As we have already stated, in the forex market, we are dealing with exchange rate parity. In other words, whenever you decide to buy a currency pair, you are actually trading the value of that currency pair against another currency pair.
For example, by buying EUR/USD, you are predicting that the EUR will increase in value against the dollar. In simpler terms, you are actually buying euros and selling dollars.
If you buy the euro/dollar currency pair and make a sale, in fact you sell the euro and buy the dollar and hope that the exchange rate will change as the price of the euro decreases and the price of the dollar increases, and you benefit from this change.
This also applies to all stocks traded in forex, such as gold, silver and oil.
Types of two-sided market transactions in Forex
With complete familiarity with the concept of two-sided forex market, now it’s time to get acquainted with the methods and types of transactions in this market.
In the two-sided forex market, there are four types of transactions, which we divide into two categories: buying and selling transactions.
The first type of transaction is the spot or cash transaction, in which the two parties to the transaction trade different currencies with each other in cash. This type of transaction is very common and most of the forex transactions are done in this format.
The second type of transaction is the Futures transaction, in which the two parties to the transaction set a price for the future date and trade the desired currencies at that time.
The third type of transaction is the options transaction, in which a party to the transaction has the right to buy or sell different currencies at a specific time and executes the transaction at that time. This type of transaction is used to reduce risk and increase profit in the fx market.
The fourth type of transaction is the CFD transaction, in which the two parties to the transaction sign a contract for the price difference of different currencies at a certain time. This type of transaction is relatively new and is experiencing rapid growth in the forex market.
Purchase transactions in the two-sided forex market
1 – Direct purchase: You directly buy BUY and enter the transaction at the current market price in the desired share or chart.
2 – Buying conditionally in case of price increase (Buy stop): In this case, you predict that if the price reaches a higher number, then the market will definitely rise and you want to buy transactions at a higher price.
Suppose the price of gold is now at the price of 1980 dollars per ounce, you have analyzed that if the price of gold reaches the price of 2020. The market will definitely be bullish and it will increase to a higher number like 2100.
By setting a buy stop order at the price of 2020, you have the possibility to open a buy deal for you if the price reaches this number, even without checking out the chart or paying attention to the market.
3 – Buying conditionally if the price is facing a decrease (Buy Limit): In this case, you predict that the market will start to rise again from a certain price or a certain price area if it has a slight decline.
Suppose the price of gold is now 2050 and you have predicted and analyzed that if the price makes a small correction, it will rise again by 2020 and we will see an upward trend.
By specifying a buy limit order, you determine that after the price drops to the specified number, a purchase transaction will be opened for you, and again without the need for you to be at the top of the chart and pay attention to the market.
Sales transactions in the two-sided forex market
1 – Direct sale: You directly sell the transaction or SELL at the current price
2 – Conditional selling in case of price reduction (SELL stop): In this case, you predict that the price will take a completely downward trend if it decreases to a certain extent, and you can join the market with a sale at that price and gain profited.
Imagine the price of gold is 2000 dollars per ounce, you have analyzed that if it falls below 1980 dollars per ounce, you will have a downward trend to 1900 dollars per ounce of gold, so with this order you place a sell condition at the price of 1980, as an order A sell stop that creates a sale transaction for you if you are not on the chart and the price reaches this number.
3 – Selling conditionally if the price is increasing (SELL Limit): In this case, you predict that if the market rises a little, it will face a decrease again at a certain price.
In this case, you register a sell request at a higher price by using the Sell Limit command, so that if you are not at the bottom of the chart and the price rises, you will enter at the set price by selling.
Imagine the price of gold at this moment is 1980 dollars per ounce and you have predicted and analyzed that if the price reaches 2000, it will face a resistance and it will fall again. 2000, so that if you are still not on the chart and the price reaches that number, you will open a new deal with a sale.
Important points in trading in the two-sided forex market
In any market, some points should be observed in order to reach a reasonable profit and avoid its possible loss.
1 – Be sure to use profit limit and loss limit for your transactions.
No analyst can say that I do 100% correct analysis, so in order to avoid more losses, you must definitely have an exit point at a specific loss or a stop loss for all your transactions.
Also, your analysis may be correct, but we said that the market is two-sided and the two-sided market is a highly volatile market, maybe your position will be beneficial and it will accompany the movement of the market up to your desired area.
But if you don’t have access to the market for any reason, then you have to leave it, reasons such as internet outage or power outage, or even your work conflict that makes you not pay attention to the chart and the market, and maybe even the market fluctuates in a moment after use. It is definitely recommended from the profit margin.
2 – Management of capital and volume of input to transactions.
In the two-way market in forex, capital management is the most important principle. Be sure to take sufficient advantage of capital management for your transactions, which means that depending on the type of account and your balance and the currency pair you are trading on, you must control the input volume, and use a reasonable trading volume.
3 – Rational use of leverage or leverage.
Leverage is a double-edged sword and may lead to irreparable losses in any one-sided or two-sided market, so use logical leverage to make the best use of it.
Advantages of the two-sided forex market
The two-sided feature of transactions in any financial market has many advantages, which are also evident in fx market. We will briefly mention some of these advantages so that you know the difference between operating in a two-sided market and a one-sided market.
- Profitability of the market in any situation.
- Shortening the hands of speculators and dealers.
- Reducing abuse of the market and removing the hands of gangs from the market.
- The possibility of continuous trading in the forex market at any hour of the day and night, both in upward and downward trends.
In addition to these cases, many other cases can be mentioned, but due to the length of this post, we will skip it. If you have any comments or questions about this article, please let us know in the comments section.