I know that every account starts with US dollars as base currency. However and I am confused about selling of other currencies.
Lets take an example…
I start with $1000 in my account. I then decide to sell GBP/USD currency pair and I am successful in doing so. Now, how was that transaction possible when I haven’t got any GBP in my account, instead I have only $1000 - don’t I need to buy GBP first and have it in my account in order to sell the GBP/USD pair?
Lets take another example…
I start with $1000 in my account. I then decide to sell GBP/AUD and am successful in doing so. How was that possible when my account only hold US dollars instead of GBP?
Please can anyone explain what goes on in the examples cited above.
Hi Slayer, there are brokers which accept different currencies as base currency. I use an EUR account for one.
Let’s imagine this scenario, a bank in Japan can give me a [B]loan[/B] with 0.5% interest per annum. And a bank in Australia can give me an [B]interest[/B] of 5% per annum if I put my money with them.
Being the wise guy, i figure, hey why not I borrow from the Japan bank and put my money in the Australian bank and earn interest there? So I take a loan of 100 million yen, convert it to Aussie, and put it in their bank. So now I have 1.63 million Australian dollars earning interest in an Aussie bank.
This is how you can transact without using any USD per se. I have just made went long on AUDJPY; essentially selling the second currency and buying the first with that money.
Yet at the same time no bank would give you a loan without a guarantee right? So then they take 1% as ‘safekeeping money’. (Actually I’m not too sure why we have margins but that is irrelevant to your question)
If I take out my money one day later, after the daily calculation of interest, I have an extra AUD$223.29 because of interest. (of course we now have to then calculate the yen’s loan interest blahblah) but fundamentally you need to know that this is called swap/rollover and it happens at 5pm EST.
Not taking the interest into account, lets say the exchange rate jumps from 100Yen = 1.63 AUD to 100Yen = 1.62 AUD. With just the exchange rate alone, I have made 100 pips. I can cancel both loans/deposits and get more Yen than I put in. In a trading account, the pips will then be converted back into USD so it can be credited to my trading account.
So what I understand from your post is that the forex broker loans us the GBP via leverage in order for us to sell it and buy the USD in the GBP/USD example I cited above. Is that what you meant?
Another thing. What happens at 5pm ? You get billed by your broker is the change ratio is negative or he’s funding you if the ratio is positive ? Or nothing is happening ?
[B]I see that there are a lot of newbies here since I completed my work on this forum in November!! [/B]
To answer your question…
NO you have not got it correct!!
Your computer program [U]converts [/U]your USD for GBP according to the current exchange rate.
You now have GBP and your computer can work with that in trading GBP/AUD.
At the end of the trade a [U]conversion is done[/U], and the profit or loss is changed back into USD (at the current rate) or whatever base currency you have set as a default on your program.
In my case, the base default is AUD since I am in Australia.
All my trades are switched back to AUD after completing the trade.
hey tymen1, good to see your posts again. i’m intending to migrate to australia, what broker do you use? is it metatrader usable? i’ve never really understood the rollover rate, the whole interest percent minus interest percent thing. (plus i’m a day trader and am well asleep during the rollover :))
I am going back on holidays soon but I just have time to answer your post.
Firstly, welcome to OZ when you do come over here.
I do not worry about rollovers either because, like you, I am also a day trader.
(spot forex).
Since I am a candlestick specialist, I use a platform that is especially suitable for this work.
So I use GFT Dealbook.
It is the best candlestick charting platform that I know of.
But not thro GFT - because their demo is only 30 days.
I go thro Kinetic Securities of Sydney and the Gold Coast.
As well as being a share broker, they are an intoducing broker for GFT and they give excellent service. They give the demo indefinitely.
You get to keep your funds in a Morgan Chase bank near you - USA, OZ or elsewhere.
You can google them on Kinetic Securities.com.au
OR
Phone them.
Tell Jay that Tymen sent you - you will be well looked after!!
I get no incentives or favours for recommending them - they are simply an Australian broker.
Like jawnlooi, I am quite lost with rollover, is there a clear explanation somewhere ? My broker’s one is not helpful and, sorry to say that, but forexpedia one is quite unclear too.
Take for example I am a US bank, loaning to you $100k at an interest of 1% a day, and Tymen is another bank, whom if you deposit money with him will give you 5% interest. (we’ll leave out the currency exchange)
You take a $100k loan from me and store it with Tymen. Everyday, at 5pm EST, the account ‘rolls over’.
Day 1 close:
You owe me $101k
Tymen owes you $105k
Your profit, $4k.
Therefore, from the rollover, you have earned 4% (% interest gained - % interest lost)
If it were the other way around, you take a loan from Tymen and store it with me, it would be, at day 1 close:
You owe Tymen $105k
You owe me $101k
Your profit, -$4k
Do you see it now? In the first example, you were selling Jawn$ and buying Tymen$. IE, you were going long on TMN/JWN.
Do note that in real life, the numbers are never as big as $4k because interest is by annum, eg 5% per year, so everyday is 0.0137% interest.
