Currency crosses

Hi, I am fairly new to forex so forgive me if these are stupid questions.

I hold pounds in my balance. For example, when I trade USD/JPY it will convert my profits/losses back into pounds using the exchange rate GBP/USD. Therefore I was wondering why I should ever trade the USD/JPY pair and instead use the GBP/JPY pair? Thus meaning I should never trade any pair which doesn’t have the pound as the base or quote?

Also, if I wanted to convert whatever is in my balance to dollars (or another currency) how would I do this?

Cheers.

It doesn’t matter what currency pair you’re trading, the broker does not convert your GBP from your GBP account into anything and nothing into GBP.

We’re speculating on the exchange rate, not the currencies themselves. The banks do it differently, they actually do want to own currency

Maybe this might mean you won’t now wish to have a USD account - I don’t see an advantage.

So what happens?

The simple picture is that if you “buy” USD/JPY, you have opened a bet with your broker that the exchange rate between USD and JPY will go up. If you’re right he will pay you money - the more you bet, the more he has to pay. If you’re wrong, you will pay him, money, the more you’re wrong the more you’ll have to pay him.

The reason its called “buying” is because the benefits to you are equivalent to owning USD and its value going up. Imagine you have some USD in your bank and you want to take a trip to Japan next year for a holiday. As the rate goes up, every $1 you own will pay for more JPY: the more it gpoes up, the more you will benefit.

The other reason for usage of the terms “buying” and selling" is because for many “betting” is a dirty word.

Right, thanks for that.
So if my “bet” goes the right way, how does the broker know how much to pay me in GBP if the dollar appreciates?

It depends on the size of your bet (aka “position”). Its just like horses - if you bet £10 a horse will win at 10:1, then you’ll get £100. But if you bet £100 he’ll win, then you’ll get £1000.

In financial spreadbetting, positions are actually priced at £x per pip, so its straightforwardly and honestly framed - if you bet £1/pip and price goes up 100 pips, you’ll get £100 if you close the position then.

Right, I see. So 90% of activity on the market is speculation by investment banks, funds and individuals, right? So if you’re simply “betting” on currency sure you are driving demand up and down thus influencing the price somewhat - therefore how can this be done without the currency moving hands?

We and the big banks are in different markets. They need foreign currencies to satisfy their clients’ needs for currency. Let’s imagine they have a client in Japan who needs to buy oil. Oil is sold in USD. So the client in Japan deposits some JPY with their bank and asks the bank to buy USD using the JPY so that the client can then buy the oil they need. This pushes the USD/JPY exchange rate up.

Meanwhile, we’re in a different market and we want to benefit from this rise. So we open a long bet with our broker so that as the USD/JPY exchange rate rises we make a profit.

Its like we’re betting on the value of a Van Gogh rising. We bet with the broker that the value will rise but we’re never going to own a painting. The bet we place has nothing to do with what a collector would pay for a Van Gogh.

Okay, so I understand how brokers make their profits, so how do they interact with the large banks and the interbank market?

They are two separate markets.

Care to explain?

Its like when you place a bet on a horse. When the horse wins, the owner of the horse wins prize money from the race organisers. He also sees the value of his horse rise and he may sell it for a profit, for more money than he paid for it.

Likewise, when his horse wins, because you bet it would win, you have acquired a slice of the benefits of being an owner. Your bet was with the bookmaker. You get nothing from the owner of the horse and he gets nothing from you. He doesn’t know you ever placed a bet. It doesn’t matter how many of us bet the horse would win, this does not change the probability of him winning.

You can trade any currency pair offered by your broker. The profit or loss will be calculated using the GBP rate at the exact time your position is opened.

Your post should say,

“The profit or loss will be calculated using the GBP rate at the exact time your position is closed.