Please help me to have your answer

Beginner Questions
1

Hi all.

I’m a very new member and I’m studying about FOREX in Babypips. I’ve reached to the lesson of Pre-School, it’s “How You Make Money Trading Forex”. It said that:
"…
USD/CHF
In this example the USD is the base currency and thus the �basis� for the buy/sell.

[B]If you think the Swiss franc is overvalued[/B], you would execute a BUY USD/CHF order. [B]By doing so you have bought US dollars in the expectation that they will appreciate[/B] versus the Swiss Franc.

If you believe that due to instability in Iraq and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.
…"

I think it should say that “…If you think the Swiss france [B]is not overvalued[/B],…you have bought US dollars…”

Please help me to have your answer. Thank you very much.

2

No. It’s right.

If you think CHF is overvalued, that means USD/CHF is too low. Remember that USD/CHF is the number of CHF per USD. If the CHF is overvalued, that would imply that the USD is not worth enough CHF and needs to appreciate relative to it. That means USD/CHF should rise.

3

I was very confused with this as well when I started. The best way to look at it is since the first pair is the base currency USD/CHF. If the pair goes up it means the USD Appreciates and the Swiss Franc depreciates compaired to each other. If the price goes down the the USD is depreciating and the Swiss Franc is appreciating compaired to each other.

4

Thanks for your explanation but I’m still confused.
As the lecture, "You would [B]buy the pair if you believe the base currency will appreciate[/B] (go up) relative to the quote currency. You would [B]sell the pair if you think the base currency will depreciate [/B](go down) relative to the quote currency. ". And I understood.

Now we can compare two cases in the lecture

First, "USD/JPY
In this example the US dollar is the base currency and thus the �basis� for the buy/sell.

If you think that [B]the Japanese government is going to weaken the Yen[/B] in order to help its export industry, [B]you would execute a BUY USD/JPY order[/B]. By doing so you have bought U.S dollars [B]in the expectation that they will rise versus the Japanese yen[/B]."

And second, ""USD/CHF
In this example the USD is the base currency and thus the �basis� for the buy/sell.

If you think [B]the Swiss franc is overvalued[/B], [B]you would execute a BUY USD/CHF order[/B]. By doing so you have bought US dollars [B]in the expectation that they will appreciate versus the Swiss Franc[/B]. "

I’m confused at the second example. In the first example, the Yen is weaken so we buy the pair since we beleive the base currency will appreciate. That’s quite right! But in the second example, the Swiss france is overvalued (it means the US is weak). So, why do we buy the pair???

Do you get my point? Please help me.

5

i think the misunderstanding comes from the word "overvalued."
this means that it’s too expensive…so it will probably go back down or it should go back down…
I am new myself but i think that’s why you would buy the USD/CHF

6

As pippy123 rightly commented, when you say something is “overvalued” that means you think that it is priced too high, and thus that you would expect it to weaken and decline in relative value. In the USD/CHF example they are saying that the CHF has risen in relative value too much and needs to come back down. You would thus buy USD/CHF in expectation of the USD rising in value against the CHF.

Better?

7

[B]Thank you all of you very much! Now, I got it. The misunderstanding came from the words “overvalued”. RIghtnow, I do understand not only the lesson but also the exact meaning of “overvalued” in the case.[/B]