Hello, thank you for visiting my post. I’m a newbie in FX and just join this forum. Hope the experienced traders will help me out about this problem.
Ok, the truth is. Until now I didn’t actually quite understand about FX trade. I’ve learned on BabyPips that FX is a simultaneous action of trading BASE/QUOTE currencies, right?
E.g: USD/JPY.
When I [B]BUY[/B], I actually bought USD with YEN, and when I close the position, I actually selling back USD to get profits in YEN, isn’t it?
When I [B]SELL[/B], I actually selling USD and got YEN in exchange, and when I close the position, I actually bought back USD from the market at a lower price by selling YEN back. Well that’s my understanding.
Ok, now what’s bother me is this:
Why am I buying USD with YEN? In fact my account currency is in USD.
What is the logic of selling currency on higher price and bought it back at a much lower price? = SELL. I understand the logic of BUY, that is buying something at a lower price and selling it at a much higher price to gain profits.
Please, help me out. I’m a total newbie in FX and I’m very appreciate if someone can spend their time clarifying this problem to me with [B]SIMPLE WORDS and EXPLANATIONS[/B] so I can easily understand FX. And please give the example in USD/JPY only please. Sorry for my ENGLISH. You may notice some grammatical errors as I am not from English speaking country.
You know what, if you try to get your brain around it, you’ll just end up with a headache. Just know that the quote is for the first currency of the pair and you sell if you think it will go down and you buy if you think it will go up. The mechanics of what you are actually doing isn’t really important to making money.
BUT if you really want to know, because you are one of those people that just HAS to understand what’s going on, you’ll have to wait for someone else to explain it. My little pea brain could not figure it out.
USD is the base currency for many pairs simply because of it’s popularity, for lack of a better term. In the EUR/USD pair, however, the Euro is the base currency and that makes sense, as more countries have adopted the Euro as their currency than the United States dollar. There is actually a hierarchy that goes:
* Euro
* Pound sterling
* Australian dollar
* New Zealand Dollar
* United States dollar
* Canadian Dollar
* Swiss franc
* Japanese Yen
Any currency above another currency in that hierarchy is going to be the base currency, the other is called the quote currency.
Let me see if I can explain the selling before buying idea simply. Say your friend had this rare vinyl record but she didn’t think it was worth anything. You, however, had some idea (or a high probability speculation). You asked your friend if she would sell it and she said, “Sure, why not” but she didn’t give you a price. You said, “Let me borrow it and have a listen to see if it’s as rad as the kids say it is”. Then, while you’re borrowing it, someone offers you $300 and you think “Whoa, that’s more than I thought I could get for it!”. But, you have to sell it to them right then and there with the hope that your friend will sell it to you cheaper and you can make a profit. So, you go ahead and sell it. Then, you call your friend and say “Hey, will you be so cool and sell me that record for $100?”. She’s all, “Of course, I had no idea it was worth that much, it’s yours!”. Boom, sold high, bought low.
This is probably as concise an answer you’re going to get.
I was going to say basically the same but was beat to it by lavaman.
Essentially – you are selling something of a certain value (a currency worth say 300 yen) to a third party. You borrow the something from one party and immediatley sell it to the third party for 300. You then immediatley pay back the party from whom you borrowed the value they think it was originally worth. (100 in this case).
Your net balance at the end is 200.
Now I understand about the SELL. Could you please tell me about the BUY? Yes, it’s make sense when you take EUR/USD as an example. Because we use USD for buying. But then when in term of USD/JPY. We actually take YEN to buy USD? It’s kind a confusing, because the main currency in my account is actually USD. Why am I buying USD with YEN? Can someone please tell me how this work.
Obviously you understand “buy low, sell high”, so I won’t go into another example explaining that. All you need to do is mentally separate the currency pair you are trading from the currency your account is reflected in. Just because your account is in USD, that has nothing to do with the currency pairs you are trading. For the purpose of consistency, currency pairs are pretty set in stone. For example, someone in the US, someone in the UK, and someone in Japan are all going to be trading the Euro as the base currency and the USD as the quote currency in the EUR/USD pair. It makes no difference if the end result of the trade is calculated in Euros for the person in the UK, US dollars for the person in the US, or yen for the person in Japan. For example, my home currency is USD, but I can still trade the EUR/JPY pair even though I don’t personally use those currencies in my life. It’s all about how you think one currency will do in comparison to another, my trading platform will calculate how much I win or lose in my own currency.
I would recommend picking up some kind of beginner’s literature to get your mind thinking about this stuff in the right ways. I know it sounds silly, but I picked up “Currency Trading for Dummies” and moved on to more advanced reading from there.
Sorry for my ENGLISH. You may notice some grammatical errors as I am not from English speaking country.