# Chapter 5, Part II. Intermediate Checkpoint.

Discussion in 'Complete Trading Education- Forex Military School' started by Administrator, Apr 12, 2011.

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 Part II. Intermediate Checkpoint
Commander in Pips: Ok, son, I think that now is the time when I will ask some questions and you will have to answer.

Pipruit: Well, Sir maybe we should study a bit more. I’m not sure that I’m ready to take a test yet.​

Commander in Pips: Don’t worry, pal. This will just be shallow checkpoint that is based on a previous chapter – a single chapter. If you’ve listened carefully, you will not have any problem at all.

Pipruit: If you are saying it like that… I have nothing more than just to believe you. But I have to warn you, that I’ve skipped all the classes at McConnell-Brue’s Economics Course, so I’m absolutely flat with it.​

Commander in Pips: We will touch only simplest things currently. Detailed investigation of Fundamental analysis we will do later.

Pipruit: Ok, let’s try it then.​

Let’s assume that you’ve investigated the economies of the US and the EU and come to the conclusion that the US economy will be stronger in nearest future compared to the EU economy. For simplicity we also assume that economy growth coincides with currency value growth. What kind of trade should you take with EUR/USD pair?

Pipruit: Let’s see. We’ve estimated that EUR is a base currency in EUR/USD pair. It means that whatever I will do (Buy or Sell) I will do this with the EUR, because the base currency determines the trade. According to your conditions, logically, I should wish to Buy USD, because, as you’ve said, the US economy will outperform the economy, so the USD will rise relatively to the EUR. But I can’t buy USD directly, because we trade the EUR/USD pair and I can buy or sell only EUR for USD. Hence, I have to sell EUR for USD…

If the USD value will increase relative to the EUR, then the EUR/USD ratio will decline – consequently, I should Sell EUR/USD.​

Commander in Pips: Brilliant!

Now let me rephrase a bit previous task. Say, you expect that EU economy will be weaker relative to the US economy. What should you do in this case?

Pipruit: Ok, then EU economy will underperform compared to the US economy; hence the EUR will perform weaker relative to the USD… Wait a minute – this is the same condition, but from another point of view. It’s much easier to analyze, because conditions are based on Base currency. EUR/USD will decline – the answer is the same - I should Sell EUR/USD.​

Commander in Pips: Right again. I just want to show you, that reducing of conditions to base currency makes analysis easier, than from perspective of quote currency. But this is important only in the beginning of your FOREX training. Soon, you will be able to do this off the top of your head.

Pipruit: I think I’ve got it, even after such easy example. Indeed, if you expect that some currency will outperform, hence the counter currency will underperform. And it’s very simple to decide what to do with the particular pair.​

Commander in Pips: Ok, if you’re so smart boy, here is another task for you:

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Lasted edited by : Feb 7, 2016