2373stevieb
If you hold £10000 and while listening to the news you come to think that the value of the Euro vs the Dollar could somehow be impacted, you are shrewd to realise that as a holder of Pound Sterling there is no direct way for you to gain some kind of exposure to the EUR/USD currency pair.
The way this is solved in the world of global foreign exchange is with a chain of transactions that result in money being exchanged between different currencies to achieve a desired result or effect.
So for example:
The current quoted EUR/USD rate is 1.2345
This says that 1 whole monetary unit of the base Euro currency buys or is worth 1.2345 whole monetary units of the quote USD currency.
If the base currency increases in strength or value, it will come to command more of the quote currency eg EURUSD 1.3456.
If the base currency decreases in strength or value, it will come to command less of the quote currency eg EURUSD 1.1234
If the quote currency increases in strength or value, it will come to require more of the base currency in exchange.
If the quote currency decreases in strength or value, it will come to require less of the base currency in exchange.
If you say you expect the euro to increase against the dollar (or dollar to decrease against the euro), you are saying you soon expect it to command more than 1.2345 dollars. To take advantage means u have to obtain some dollars and use those to buy euros. If you obtain 1.2345 dollars and buy euros you will get 1 euro. If you wait a few days and were right about euro strength, when u exchange your euros back you get for example 1.3456 dollars and made a profit.
If you say you expect the euro to decrease against the dollar (or dollar to increase against the euro), you are saying you soon expect it to command less than 1.2345 dollars. To take advantage means u have to obtain some euros and use those to buy dollars (change out of the weakening currency). If you obtain 1 euro and buy dollars you will get 1.2345 dollars. If you wait a few days and were right about euro weakening, when u exchange your dollars back you get for example 1.098 euros (more than your initial 1 euro as the rate fell to EURUSD 1.1234) and made a profit.
How you get in and out of the dollars and euros you need while holding GBP comes down to EUR/GBP and GBP/USD, the published rates allowing you to exchange your money out.
So to do the first trade you would exchange ur GBP into dollars using the gbpusd rate then into euros using the eurusd rate. The second trade you would exchange ur GBP into euros using the eurgbp rate then into dollars using the eurusd rate.
Now of course you can see that once you change out of GBP, the two rates that helped you get into dollars or euros move as well like the pair you are speculating in.
This means even after you did either trade above, that your profits might take a hit (weakening pound) or bounce (stronger) when you change your profits back into the Queen’s faces - this is foreign currency risk exposure and is dealt with one way by timing the exchange back.
When you’re trading with a broker, the chances are you will not be trading currencies literally. But what will happen is that the broker will show you the market rates so you can make decisions but when you click to trade your money isn’t moved around as above. The broker may or may not be caused to trade (with a bank) by your click but he will in any case promise to pay you profits you gain from movement in the rates when you predict them correctly. Just as you promise to accept any losses to your account when you predict rate moves incorrectly.
Read up on CFDs contracts-for-difference or spread betting as used in the UK. These don’t exist in the USA for example so the other way people trade is with Futures contracts.
Hope this helps.