I feel so stupid for asking this

Beginner Questions
1

And will end up winning Comedy Forum Post of the Year but here goes:

  1. Isn’t it the case that you can’t make money if you speculate on your domestic currency rising against another?

Eg:
You think that the GBP pound is going to soar against the USD so:

  • You buy £10,000 at the GBP/USD exchange rate of 1.5000 (costing you $15,000).
  • A week later the GBP doubles against the USD so you sell and receive $30,000.

If you’re an American living in America, you’ve doubled your money. You repay Aunt Mavis the $15k she lent you for the trade and you also have $15k of your own. Result: win.

But, if you’re an Englishman living in England it’s a different story. Aunt Mavis lent you 10,000 GBP and the pound doubled in value but you still only have 10,000 GBP.

So to me, it doesn’t make sense to speculate on your domestic currency rising against another. If your hunch comes true and your domestic currency rises then you maintain your starting position (as happened to Mr English in the above example - starting and finishing with £10k). However, if you’re wrong and the pound sinks to half its value against the dollar then you lose as you start with £10k yet end with £5k.

And this leads me on to my next takeaway…

  1. you can only make a profit if your domestic currency suffers - thus we should all be speculating that other currencies will succeed against ours as we will get more moolah when we cash out (as happened to Mr American in the above example)

Which takes me on to my final conundrum…

  1. How can you speculate on a pair that doesn’t involve your domestic currency?

Eg: Mr America thinks that the EUR will rise against the NZD but that doesn’t necessarily mean that there will be a beneficial impact involving the USD. The Euro may quadruple against the Kiwi dollar but unless it also crushes the US dollar along the way then he’s not going to make any profit - so how does anyone speculate on pairs that don’t involve their own domestic currency?

See, I told you this post was comedy gold.

1 Like
2

Your question is valid only under two assumptions:

  1. You live in UK but you have an account in USD;
  2. You don’t use any leverage.

Don’t think too much about currencies. It would be much easier if you thought of currency pairs as assets, just like buying Apple stocks.
You are an Englishman, having your account in GBP. You invest £10,000 in GBP/USD. If GBP/USD doubles, you double your investment. If GBP/USD goes up by 10%, your investment goes up by 10%. Simple as that.
This is without considering the leverage.
If you use a leverage of 30:1, in your case scenario, with GBP/USD doubling, you get +3000% out of your investment, so you turn £10,000 into £310,000.

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This is not a comedy question, its a regular source of confusion for new forex traders. The industry does not help because it focuses on the idea that when you believe the GBP/USD exchange rate will go up, you are actually buying something. In fact you are not buying anything, you are just placing a bet that this number will rise.