Well I must be mentally challenged since I don’t really get the logical mechanism behind a trade and how the trade actually takes place.
Its almost the more I read the more I get confused.
Lets say I have 1000$ on my trading account. I want to trade CHF/JPY and I forecast that the Swiss Franc will skyrocket and be really strong so I make a BUY order.
But wait I only have $dollars on my account?
How is my money transformed?
Is it first traded into USD/JPY and then I use to JPY to buy CHF?
If I buy the main currency its the ASKING price I have to pay correct?
Hopefully there are kind souls out there who can help
Dont concern yourself, your broker will handle the transaction. You never physically receive any of the currencies you trade, so wont need to exchange them.
This may initially make things more confusing, but stay with me…
The money in your account is not converted (transformed) at any point. You never actually own any currency you “buy”. In your case, you don’t really buy CHF when you go long CHF/JPY.
Basically, all that’s happening is you’re making a bet on the movement of the exchange rate. The money in your account, when used as margin, simply acts as a surety against loss.
That said, because you’re trading at non-USD pair in your account, there are two exchange rate applications which must be made.
First, in order to determine your margin requirement, the value of your CHF/JPY position must be converted into USD terms. That’s done using the USD/CHF exchange rate. So if you’re trading 10,000 CHF/JPY, you would divide 10,000 by the current USD/CHF rate to get the $ value of the position, and from there your margin requirement.
Second, in order to determine your profit or loss on the position, you have to convert from JPY to USD using USD/JPY. So you divided the pip gain/loss of CHF/JPY, which is quoted in terms of JPY, by USD/JPY.
hello Masthabrood,
Its nothing to get confused here. in the books of currencies the first thing you learn is Base Currency and Quote Currency.
The base currency is the currency against which exchange rates are generally quoted in a given country. Like in the pair GBPUSD, GBP is the base currency and USD is the quote currency.
So whenever you put the trade all the calculation is determined on the basis of Base currency. You should always make your calculations on the basis of notional amount.
Let us take the example of your trade i.e. CHF JPY
To calculate Notional Amount:
Price of USDCHF x Lot Size
Assume you have traded for 5 Micro lot CHF JPY, which means you are going long on CHF and short on JPY
Now the Notional Amount is
= 1.00505 * 100000 (1 standard lot)
= $100505
To calculate your turnover Just multiply your lot size with the notional amount. In your case
=0.05*100505 = $5025
This way your turnover is calculated in USD terms and comission is charged over this turnover.
So this is obvious first your turnover is converted into USD terms than the further calculation.
Thanks for taking your time to answer, I really do appreciate it. You where correct on one thing particular - “may initially make things more confusing”.
You wrote that I first have to convert USD/CHF exchangerate but isnt USD/JPY?
If I am going long on CHF/jPY does’t this translate that I am buying CHF with JPY currency?
Or have I totally lost it here?
Lets say I am trading with EUR/USD. This time I am going short, translated to English - I think the main EUR will weaken against dollar. I am selling EUR and receive dollars (actually I know the broker in a way is lending me EUR) and upon a close and if I predicted the EUR would fall I make a profit after paying back what I owed.
Now lets say I predict that EUR will get stronger, especially against the dollar - so this time I am going long.
So with USD I buy EUR and wait until the pips has passed the ionsphere and then close the deal.
Now in metaTrader, to make me more confused we have tickData to left where the colors are red for asking price (buy) and blue for sell…
But why are the colors of the buttons not matched with the chart? I am I missing something?
What you see on the chart is usually the ask price(the bid price is hidden)
If you buy (go long) your order gets filled at the ask price(red line in order screen and same line as on chart screen
If you sell (go short) your order gets filled at the bid price (blue line)
