Maybe this will help.
Here's what's going on behind the scenes when you make a trade in EUR/USD. Let's assume we're buying 100,000 at 1.30 and that we're dealing with a USD based account.
Step 1: Borrow 130,000 USD (100,000 x 1.30)
- Pay the Overnight USD interest rate
Step 2: Convert to 100,000 EUR
Step 3: Deposit EUR
- Earn the Overnight EUR interest rate
When the trade is done, you reverse the process - withdraw the EUR desposit, convert the currency back to USD, repay the USD loan, and what's left is the profit.
Now let's use the same assumptions for a short position.
Step 1: Borrow 100,000 EUR
- Pay the Overnight EUR interest rate
Step 2: Convert to 130,000 USD (100,000 x 1.30)
Step 3: Deposit USD
- Earn the Overnight USD interest rate
When one is long EUR/USD one is holding EUR with an open liability in USD. Profit is made by the appreciation in the value of the EUR vs the USD, meaning EUR/USD rises.
When one is short EUR/USD one is holding USD with an open liability in EUR. Profit is made by the appreciation in the value of the USD vs the EUR, meaning EUR/USD falls.
|