Hi all,
think about the most newbie person of the world, that’s me. So, please don’t bash me if the question seems stupid or naive 
I was asking myself, if I have an account in USD, whether there’s some way to profit from a downtrend in EURUSD. I understand that I could earn pips from an uptrend by going long, but I don’t think the contrary applies, am I right?
Should I only look for downtrends in my account’s currency pehaps?
I hope I’ve been clear!
Cheers and happy pipping!
It doesn’t matter what currency your account is denominated in, you can trade long or short in any currency for profit.
Hi shroomhead! I understand that trading long and short is available for any kind of account, but I cannot understand when shorting should be used. Trading short and long refers to the main currency in the pair (i.e. EUR in EURUSD), if I understand well. So, if all of my account is in $, the only option I have is going long and I could short only active long positions in €. Is that correct?
Nope. You can go short or long on EUR/USD or any other pair.
Hello, zallaaa
When you take a LONG or SHORT position in the forex market, you are taking a position in a PAIR, not in just one currency. More specifically, you are taking a position on the RELATIONSHIP between the base currency and the cross currency in that pair.
If you take a LONG position in the EUR/USD, you are speculating that the EUR will gain in value versus the USD.
If you take a SHORT position in the EUR/USD, you are speculating that the EUR will decline in value versus the USD.
Think about all the different ways that the EUR could [B]gain[/B] in value versus the USD:
• both the EUR and the USD could rise in value (versus, say, gold), but the EUR could rise MORE than the USD
• the EUR could rise, while the USD remains unchanged
• the EUR could rise, while the USD falls
• the EUR could remain unchanged, while the USD falls
• both the EUR and the USD could decline in value, but the USD could decline MORE than the EUR
In each of those situations, the value of the [B]EUR/USD pair[/B] would increase. And, if you were LONG the EUR/USD, you would profit in each of those situations. Furthermore, it would make no difference what currency you hold in your account. Your profit would be booked to your account — in your account currency, whatever that might be.
Here’s a homework assignment for you:
See whether you can figure all the different ways in which the EUR could [B]decline[/B] in value versus the USD.
Ok, I think I get it. My problem was on how profits are calculated in a trade. I believed that it was just a matter of exploiting an uptrend in order to exchange the secondary currency (e.g. USD in the EUR/USD pair) back to your account currency (e.g. EUR) as soon as it had suitably appreciated, and so I believed it it was only possible if money were actually exchanged. However, if I understand well, profits depend on the entry and exit point of the trade instead. It is kinda like purchasing a call option in a sense. Is that a correct interpretation (quite messy perhaps)?
PS: for the homework assignment, the ways for EUR to decline vs USD. Are they just the opposite of the one you’ve listed? We are talking of a ratio after all.
I’m going to stay away from the “options” analogy. There are too many ways to get tripped up, trying to force a comparison between spot forex and options.
Instead, I’m going to use a gambling analogy — because speculating is so similar to gambling, that I believe that debate is settled.
Some traders will get in a huff over that statement, but I don’t care. There are several “gambling” threads on this forum, where they can go to vent. Those “gambling” threads are immortal — they will never die. Or, more correctly, they really are dead – they just won’t go away. They’re zombie threads. But, I digress.
Before we talk about placing “bets” on the EUR/USD, consider this: Consider a hypothetical “absolute” standard of value for each individual currency. Let’s use gold. On Friday, NY spot gold closed at $1,753.66 and €1,271.54 at 5pm New York time.
Assuming (hypothetically) that all values (prices) are measured against gold, we can use the price of gold in dollars, and the price of gold in euro, to calculate that €1 = $1.37916. That’s very close to where the retail spot forex market closed (EUR/USD = 1.37901) on my trading platform at approximately 5pm on Friday.
You pointed out that a forex price is essentially a ratio. And you are correct. That means that you can work with a forex price, mathematically, in the same way that you would work with any ratio. For example, [B]EUR/USD = x[/B] can be read as [B]1 euro / 1 dollar = x[/B], which can be transformed to [B]1 euro = x dollars[/B]. In the case of the price at Friday’s close, EUR/USD = 1.37901 means that €1 = $1.37901
When you take a position in the forex market, you are essentially betting that the ratio will change. If you are LONG EUR/USD, you are betting that the ratio will increase, say, to 1.3850. If you are SHORT EUR/USD, you are betting that the ratio will decrease, say, to 1.3750.
To place either of these “bets”, all you need is sufficient cash in your account to cover your broker’s required margin, plus the spread, plus a cushion for possible losses. It doesn’t matter what currency you hold in your account. You don’t need an account denominated in either euro or dollars in order to take a position in the EUR/USD — just as you don’t need to own a horse in order to bet on a horse-race.
As you correctly pointed out, your profit or loss on any position depends only on your point of entry, and your point of exit — that is, on the change in the “ratio” that we’ve been talking about, expressed in pips, and subsequently converted to cash in the currency of your account.
I’m not going to do this for you. Think it through. If a forex price is a ratio, that means it works mathematically just like a fraction, with a numerator and a denominator.
So, [B]EUR/USD = some price[/B] is similar to [B]a/b = x[/B] in high school algebra class.
How many different ways could you change [B]a[/B] and [B]b[/B] to make [B]x[/B] smaller?
First of all, let’s do the homework. To make x smaller I could:
Now,
So, the point is that I’m really taking a bet and even if there are exchanges to be made in order to exploit the change in the ratio those are irrelevant since the platform will take care of them for me. Is that correct?
Correct. Congratulations.
This will come as a surprise to you.
[B]No currency exchanges are made by you, by your trading platform, or by your retail forex broker.[/B]
Suppose you have a U.S. dollar-denominated account, and suppose you trade GBP/JPY with that account. You will never buy or sell any pounds or any yen, and your retail forex broker won’t either. In fact, your U.S. retail forex broker probably doesn’t even own any pounds or yen.
From time to time, you will hear one trader try to explain to another trader that taking a position in the spot forex market is “like buying one currency in a pair, and selling the other.” Whenever you hear that, just ignore it. It’s totally wrong. There is no buying or selling of currencies at the retail level.
[B]As a retail forex speculator, you will never buy, sell, own, or exchange any currency.[/B]
So, what does happen when you place a retail spot forex trade? It depends to a great extent on the type of broker you deal with. That’s a huge topic, which can’t be covered, in detail, here. Let me just make some brief comments about 3 types of brokers.
The lowest form of “broker” (many would say the lowest form of life) is known as a “bucket shop”. I put “broker” in parentheses, because there is no brokering involved in the way a bucket shop operates. To continue our gambling analogy, a bucket shop is analogous to a bookie. A bucket shop has no affiliation with liquidity providers (banks), in the same way that a bookie has no affiliation with a racetrack.
So, when you deal with a bucket shop, you are not actually participating in the worldwide forex market. Your dealings with a bucket shop are no different from placing a bet with me.
Notice that no currency is bought, sold, owned or exchanged when you transact business with a bucket shop.
Much further up the ladder from bucket shops, we find Straight-Through-Processing (STP) brokers. If you deal with an STP broker, every one of your trades will be offset by your broker — meaning that he will place an identical trade with one of his liquidity providers, reducing his exposure (to your trade) to zero.
Again, no currency is bought, sold, owned or exchanged by you, or by your STP broker.
Between the bucket shop and the true STP broker, we find the retail market-maker. This “broker” may behave like a bucket shop, or he may behave like an STP broker. That is, he may trade against you, by simply holding the other side of your trade (if he strongly believes that your position is wrong). If you ARE wrong, and if your market-maker broker has held onto your trade, he profits by every dollar that you lose (as opposed to just collecting a spread).
On the other hand, your market-maker broker might offset your trade immediately (by placing an identical trade with his liquidity provider). Or, he might aggregate a number of long and short positions in a particular pair, and then offset any imbalance that exists (again, by trading with his liquidity provider).
It matters whether your retail forex broker is a market-maker, because it matters whether he is trading against you. When he trades against you, it is to his advantage to make you lose money. When he behaves like an STP broker, he does not profit from your losses. But, how do you know what he’s doing at any particular time? The answer is that you can’t know.
Clearly, like bucket shops and STP brokers, retail market-makers do not buy, sell, or exchange currencies. They either bet against you, or they pass your bets up the line to their liquidity providers (banks).
The exchanging of one currency for another, that you have been asking about, occurs further up the forex food-chain, at the interbank level. If you want to delve into the arcane world of trading at that level, have at it. That’s way too complicated for me, or for this forum.
You can make pips going long/short. This is not like stocks but given your query, you may want to spend some time online with tutorials before opting to trade with real money…just a suggestion
Going short usually means selling out the base currency, and purchasing it later when it retraces further down. Essentially, you’ll be selling high and buying low down the road, leaving you with some pips as profit.
That’s quite interesting Clint. Actually, I believed that some kind of exchange did take places, perhaps by electronic means, already at the broker level. I would say that I was blinded by the idea that the exchange was necessary in order to exploit the rate differentials. However, imagining the process like a gamble makes it clearer. Thanks for all the explanations!
Don’t worry Fxmall, I have no intention to ever enter into a trade with real money before a GREAT deal of study 
What part of There is no buying or selling of currencies at the retail level did you NOT understand?
Ok sorry I only read the first few posts and you guys are way to complicated for my over worked brain right now to continue reading. I am going to make this answer very easy. Open a demo account in usd and trade with it. You will figure out the rest trust me.
Clint is spot on here. In spot forex you do not buy nor sell anything. Instead you are trading your usd for euros only to trade back at a better price (or for most of us a less appealing price for a loss). The reason it is set up as buy or sell is from what people understand. Stocks you actually buy shares of a stock so you really are buying a stock. For example if you buy over 50% of google (good luck) you essentially now own google. Now you have futures market where you actually buy a contract of what ever it is. I personally have a issue with futures contracts for one reason. If you buy a contract of oil and it expires and I want my oil. Who owes it to me? Good luck cashing in on it. Options are the same you are buying an option to buy a contract at a certain price in the future. Spot forex is not that way. If it was when I sell my USD for EUR where does it show on my account balance how much I own in EUR (if I bought them my account should show it. no?) But when trading stocks it shows in my portfolio exactly how many shares of a stock I own and the price of that stock. Because I actually own it. Yes in futures markets if you bought a crap load of euros and it expires you can (from who I dont know) collect your euros (but that is not a good idea and I am not going into why) hope that clears up matters. I know what I just stated here is a little off here and there but it explains the jist of it hopefully in terms people understand.
Dude whoa I got to stop you since when cant you make money going long or short in the stock market? I have been trading stocks since before I knew I was trading stocks (got to love family inheritances). Yes it is not calculated in pips persay (I am going to call bs there) it is calculated in actual dollars and cents (even better term imo)
That’s correct but the modes differ, in the fx market, the set up is pretty simple or at least, appears to be.