I am asking this question because I am new and I want to make sure I am understanding things correctly. If you want to go long on a currency like the Euro you would sell US dollars and buy Euro. This transaction seems obvious to me. However, let’s imagine a scenario where you want to go long on USD. How do you do this if your “buy-in” currency is US dollars? Wouldn’t I simply not deal with Forex at all until I thought the dollar would weaken by keeping my US dollars in a checking account? How does somebody who makes money in US dollars take a “long” position in US dollars via Forex? Is it possible? The only thing I can think of is some kind of contract where you promise to trade dollars for another currency at some future date at some specific price thereby making a profit (or loss) off the difference of the valuation of the dollar at that future date and the contracted price.
To recap: If you are an individual with an income denominated in US Dollars is there any other way to make the bet the US Dollar will increase in value other than a) refraining from trading the US dollar for anything at the present time or b) creating a kind of futures contract with another party involving the value of the US dollar.
it doesn’t matter what your account is in. if you go long on EUR/USD then you are buying the euro and selling the dollar. If you go short on EUR/USD then you are selling the euro and buying dollars. Don’t think of it as buying and selling, think of it as betting on up or down
or to answer the question what ever chart you are looking at to go long click buy if you are going short click sell and your done. Sorry for the long explanation.
Thank you for your responses. I guess I still don’t understand it. I’m trying to understand it fully. What is actually happening when I am buying the currency pair USD/EUR? What is happening when I close out my position?
Am I actually exchanging USD for EUR somewhere in a Forex vault?
If I have US dollars and I buy the currency pair USD/EUR (buy USD and sell EUR) how am I selling EUR? I don’t have any EUR. I have only US dollars. How do I sell something I don’t have? How do I make money on a rising US dollar if I already have US dollars?
If I expect the US dollar to rise in value wouldn’t it make sense to wait until it has risen to its peak before I begin conducting transactions with it, whether it be a currency or anything else?
I guess I am looking for a sort of total awareness of what’s going on during these currency transactions because as it has been explained to me, and through my scant reading, I still don’t fully understand it.
Ok let me try to explian this (god help us all I dont even understand myself). ITs EUR/USD not USD/EUR. That being said lets say you went long on EUR/USD with a thousand dollars. What you just did was trade in your 1000 USD (or sold your USD)for EUR (BUY) what ever price it is worth at the time. Now when the Price of the EUR rises over the USD and you now want to close out your trade. All you are doing is Tradeing your EUR (selling) for USD (Buying). Since the EUR is now worth more than when you fist opened the trade that difference in price is your profit. Thats why it is called tradeing essentially your just tradeing the currency in hopes it will have a higher value and once you can get a better price then you just trade back for a profit. Hope you understand that.
Maybe this will help. Forget completely the idea of buying or selling a currency, or a currency pair. When you take a spot forex position, you are not buying anything, and you are not exchanging one currency for another. You are speculating on the value of one currency (the base currency) in relation to another currency (the cross-currency, or quote currency).
If you have a U.S.-dollar denominated account with a U.S. broker, and you decide to “buy” the GBP/JPY, I can guarantee that your broker has neither pounds, nor yen, in a vault somewhere. You will not — as others have claimed — buy one currency and sell the other.
It’s unfortunate that we’re stuck with the terms “buy” and “sell”, in regard to taking a LONG position, or a SHORT position in spot forex, because those terms are very misleading — especially for traders who come from a stock-trading background, where “buy” means taking ownership of shares, and paying for them with cash money.
But, we are stuck with those terms. They will be with us forever, so get used to it.
But, as for a clear understanding of what’s going on, it’s more accurate to think of a spot forex transaction as placing a bet of a certain size (the notional value of your position), and putting down an “earnest money deposit” (the required margin amount) to guarantee that you will meet your obligations to your broker.
This topic comes up frequently here on the forum. Here is a recent post where I tried to answer a slightly different version of your question — 301 Moved Permanently
If you use the SEARCH feature (at the top of this page), you can probably find several other posts (or entire threads) on the subject of “buying” and “selling” currency pairs.
the pair is EUR/USD not USD/EUR.
you give the broker some money.
the broker says ok you gave me some money (in USD)I will let you use this much of my money to trade with (this is a margin account)
the broker says you can have the profit or loss I will cut you off before my money is at risk, you may lose all of yours
you tell the broker that you want to go long on the USD you do this by shorting the EUR/USD pair.
the broker will make the deal with the big banks this can happen a few different ways it depends on the brokers business model.
the broker is pays a spread on the deal when they make it. You pay a marked up spread or a commission to the broker. This is how the broker makes money. The broker has many clients some are long some are short at any one time the broker will try to maintain as much of a market neutral position as they can. Some will take the position against there client some will pass the lump of client trades on to the interbank market at sizes and times to try and maintain a neutral position.
the pair EUR/USD goes up on the chart the equity in your account at the broker goes down. the position you had them open is not worth as much now as when you had them open it. The broker will let you hold on to that position until its value is less then your account balance. This is an oversimplified margin call the exact level this happens at varies from broker to broker.
If EUR/USD goes down your position is worth more. You decide to close the position and make some profit. You click the button on your trading platform to tell the broker to close the position. The broker does this by selling USD and buying EUR. If the broker has done there job right they were market neutral the whole time they made there money on the spread they charged you it should not matter if you win or lose to the broker.
This all happens with the brokers money that they let you control. It does not mater what currency your account is based in.
