Deposit currency and the base currency of a trade
Results 1 to 9 of 9
  1. #1
    Join Date
    Mar 2017
    Posts
    3

    Default Deposit currency and the base currency of a trade

    Hi everyone,

    I'm newly into Forex and am still going through the school of pipsology But I have a question that I am having trouble grasping.

    Say my account is in USD and I long EUR/JPY. This means my USD is converted into JPY to buy EUR at the point when I open my trade right? And when I close the trade the JPY is converted back to USD?

    If so, then isn't it possible to have a net loss if USD/JPY pair dropped significantly while your trade was open? Where do I find more information on this? Based on the above it sounds like its always safer to trade the pairs where one currency is my deposit currency (USD)

    Thanks a lot!
    Last edited by melidere; 03-17-2017 at 12:34 AM.

  2. #2
    Join Date
    Dec 2006
    Location
    Wichita Falls, TX
    Posts
    2,885
    Quote Originally Posted by melidere View Post
    Say my account is in USD and I long EUR/JPY. This means my USD is converted into JPY to buy EUR at the point when I open my trade right?
    No. Your USD never gets converted. The EUR (base currency) is converted into USD (your account currency) to determine the size of the trade to calculate your margin requirement.

    And when I close the trade the JPY is converted back to USD?
    This is correct, though a slight correction is required. The conversion from JPY to USD is happening continuously as exchange rates move. This is the mark-to-market process. It doesn't just happen when you close the trade. Your account value is constantly changing in real time.

    If so, then isn't it possible to have a net loss if USD/JPY pair dropped significantly while your trade was open?
    No. The USD/JPY rate does not change whether you win or lose. It only changes the magnitude. If you have a 100 JPY profit you have a 100 JPY profit. The difference is that at USD/JPY = 100 that's a $1 profit, while at USD/JPY = 200, that's a $0.50 profit.
    John Forman
    Author -
    To view links or images in signatures your post count must be 10 or greater. You currently have 0 signatures.

  3. #3
    Join Date
    Mar 2017
    Posts
    3
    Thanks for the reply, I kinda of see whats happening when I long EUR/JPY:
    - I buy EUR with USD when I open the trade, the exchange rate is based on when I open the trade
    - To close the trade, I would buy JPY with the EUR I now hold

    So there is a chance that I could lose money even if EUR/JPY went up right? Suppose USD/JPY drops sharply the moment I opened my EUR/JPY trade. In that case I would actually have lost money in my account currency (USD) before the pair I'm trading even moved?

  4. #4
    Join Date
    Dec 2006
    Location
    Wichita Falls, TX
    Posts
    2,885
    Quote Originally Posted by melidere View Post
    Thanks for the reply, I kinda of see whats happening when I long EUR/JPY:
    - I buy EUR with USD when I open the trade, the exchange rate is based on when I open the trade
    - To close the trade, I would buy JPY with the EUR I now hold
    Put the idea of actual currency exchanges out of your mind. It doesn't happen. Better to think of it this way. You are making a bet on the movement of EUR/JPY. That movement is measured in terms of units of JPY. You need to apply the USD/JPY rate to get the USD equivalent value of that gain or loss.

    So there is a chance that I could lose money even if EUR/JPY went up right? Suppose USD/JPY drops sharply the moment I opened my EUR/JPY trade. In that case I would actually have lost money in my account currency (USD) before the pair I'm trading even moved?
    As I said in my previous post, no. If you are long EUR/JPY and it goes up then you make a profit. Let's say you go long EUR/JPY at 100 and it rises to 110. So you've made 10 JPY in profit. There is no movement USD/JPY can make that will turn a 10 JPY profit into any kind of loss in your account. The worst that could happen is JPY goes to 0 value and you don't make anything. The movement in USD/JPY can only change the size of your profit/loss, not turn one into the other.
    John Forman
    Author -
    To view links or images in signatures your post count must be 10 or greater. You currently have 0 signatures.

  5. #5
    Join Date
    Oct 2013
    Posts
    936
    Quote Originally Posted by rhodytrader View Post
    Put the idea of actual currency exchanges out of your mind. It doesn't happen. Better to think of it this way. You are making a bet on the movement of EUR/JPY. That movement is measured in terms of units of JPY. You need to apply the USD/JPY rate to get the USD equivalent value of that gain or loss.



    As I said in my previous post, no. If you are long EUR/JPY and it goes up then you make a profit. Let's say you go long EUR/JPY at 100 and it rises to 110. So you've made 10 JPY in profit. There is no movement USD/JPY can make that will turn a 10 JPY profit into any kind of loss in your account. The worst that could happen is JPY goes to 0 value and you don't make anything. The movement in USD/JPY can only change the size of your profit/loss, not turn one into the other.

    So its not yet clear if your account currency is USD what happens if you are long on EURJPY. To have a reason for calculations lets imagine we trade spot forex, not CFD. So buying 1 lot eurjpy actually means that we borrow Japanese Yen for US Dollars, then selling Yens to get Euro right? What about spread costs there?

  6. #6
    Join Date
    Mar 2016
    Posts
    348
    Quote Originally Posted by profitbaby View Post
    So its not yet clear if your account currency is USD what happens if you are long on EURJPY. To have a reason for calculations lets imagine we trade spot forex, not CFD. So buying 1 lot eurjpy actually means that we borrow Japanese Yen for US Dollars, then selling Yens to get Euro right? What about spread costs there?
    Wrong! Please read Rhody's post #2 and ignore this post.

  7. #7
    Join Date
    Jul 2013
    Posts
    2,510
    Quote Originally Posted by profitbaby View Post
    To have a reason for calculations lets imagine we trade spot forex, not CFD. So buying 1 lot eurjpy actually means that we borrow Japanese Yen for US Dollars, then selling Yens to get Euro right?

    No ... not right. Melidere needs to read posts #2 and #4 and take no notice of yours.

  8. #8
    Join Date
    Mar 2016
    Posts
    348
    Quote Originally Posted by profitbaby View Post
    So its not yet clear if your account currency is USD what happens if you are long on EURJPY. To have a reason for calculations lets imagine we trade spot forex, not CFD. So buying 1 lot eurjpy actually means that we borrow Japanese Yen for US Dollars, then selling Yens to get Euro right? What about spread costs there?
    Profitbaby, you're now approaching 4 years on BP and almost 1000 posts (you'll likely be honoured with a new title, Super duper, grand master ninja contributer or similar). May I just ask that you take more care with your posts and check what you are saying as, I am pretty sure, a lot of new members will take your word as gospel.

    As Uncle Ben said to spiderman " with great power comes great responsibility"

  9. #9
    Join Date
    Mar 2017
    Posts
    3
    Quote Originally Posted by rhodytrader View Post
    Put the idea of actual currency exchanges out of your mind. It doesn't happen. Better to think of it this way. You are making a bet on the movement of EUR/JPY. That movement is measured in terms of units of JPY. You need to apply the USD/JPY rate to get the USD equivalent value of that gain or loss.
    This explanation is a good way to look at it I think. To summarize my understanding then:
    • Pairs are essentially instruments that I am trading and no actual FX may be taking place
    • When I enter into a position, my margin is based on the lot size and the current Ask price of the base currency converted into my account currency (in my example it would be based on the EUR/USD).
    • While my position is open, my account equity (thus free margin) is dependent on the profit/loss I have of that position, converted in real-time in USD (in my example the USD/JPY). Here is the bid price used?
    • When I close my position, the number of pips profit/loss is given to be in USD based on the USD/JPY. Bid price at the point of close is used?

    Thanks!

Forum Sponsors

Similar Threads

  1. Replies: 1
    Last Post: 04-11-2014, 04:00 AM
  2. Is the stronger currency always the base currency?
    By fmunshi in forum Newbie Island
    Replies: 5
    Last Post: 05-22-2011, 07:21 AM
  3. Replies: 0
    Last Post: 04-24-2009, 10:10 PM
  4. Replies: 0
    Last Post: 04-24-2009, 09:30 PM
  5. strongest and weakest currency on the day
    By brendonvdh in forum Newbie Island
    Replies: 0
    Last Post: 04-11-2008, 09:36 AM

Tags for this Thread

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •  
"I have no special talent. I am only passionately curious."
Albert Einstein