I understand the concept behind selling something then buying it again at a lower price for profit, but what I don’t understand is how can I sell something I don’t own? I watched so many youtube videos of people talking about short selling, but none of them explained that.
If for example I entered a short trade on EUR/USD with one standard lot, does that mean I borrowed 100,000 units from the broker and immediately sold it? Then when I close the trade, I return those 100,000 units back to the broker and take the loss or profit gained from that trade? This is my guess on how this works, but I don’t know if this is how it actually works or not.
I think for the purposes of competent trading in forex you are over-thinking the question.
When private retail traders trade there are no physical assets involved, we are basically betting on the exchange rate between two commodities, in this case two currencies. So if you go short on RUB/TRY, at no point are you going to become an owner of Turkish Lira, and nobody is going to receive Russian Rubles from you.
You simply arranged a bet with your broker that if the exchange rate goes down he will pay you some money: the “units” are simply a way of expressing the size of the bet so he knows how much to pay you.
Thank you for clearing that up.
Does that mean us retail traders have no impact on the market since we’re only betting and not actually owning any physical assets?
The impact we have from our is tiny. Though the international banks and hedge funds do also engage in trading on their own account which does have some impact but their capital is massive compared to ours as a sector.
Its possible a single private retail trader could open such a large position with their broker that the broker had to adjust their bid/ask spread simply because of that one guy, but that would be exceptional. The other brokers of course wouldn’t be affected.
Gotcha, that makes sense. The banks would definitely have an impact because of the huge amount of money they use to trade.
Thank you so much for clearing up all of this to me!
And not even them to any large extent. People often write about their impact on markets as though they are some kind of homogenous force that all meet and decide unanimously what they are all going to today. It doesn’t work quite like that!
Remember that the volume of business created by huge investment/pension funds and the enormous volumes of international trade in commodities and goods all affect the supply/demand for currencies. These are affected by the changes in economic performance in various countries and government/Central Bank policies etc. It is not all just speculative trading!
One could maybe say that the underlying fundamental factors create the long term development of trends whereas the large-scale speculative trading of the big players creates the wiggles and wobbles along the way.
This is one reason why short term trading can be so challenging, when it is attempting to trade the wiggles and not the trend. Many experienced traders agree that trading off daily charts is much more reliable.
Interesting you bring that up. I was actually watching videos and reading some posts about this few days ago. Correct me if I’m wrong, but I think this is what people refer to as the “Market Makers” and how they change the market. It all sounded to me as if they’re this one giant group of people that all agree on driving the price up or down for their profit.
Wow I never thought of it that way. Most if not all the trading systems I’ve seen trade off the 15 minute or 5 minutes charts. I’m interested to see how trading off the daily chart works now.
This is actually not correct. It is not the market-makers that move the market. They just adjust their prices according to the changes in demand.
The market-makers are mainly the large banks, and their function is to provide the liquidity that smoothes the price movements in the market. They do this by always offering a bid and offer price without any knowledge of the clients’ interests. If their offer price is being hit most then they move their bid/offer upwards and if their bid price is being hit most then they will lower their bid/offer prices.
Your broker does the same by taking the bid/offer from their liquidity providers and wrapping their own spread around it to make their profits.
The market-makers cannot therefore just decide what price to bid and offer because it is the market itself that actually acts on the prices quoted and provide the pressures that push the market-makers bid/offers up or down.
For example, if you make a product and sell it on eBay and find that they sell like the proverbial hot cakes then you will consider increasing your price so you don’t sell them to cheaply. But if you find that no one buys them then you will drop your price. Same thing.
Worth also noting that the market-makers also buy and sell from each other which spreads their risk and also keeps the prices in line throughout the market.
For example if you go short on EURUSD, doesn’t matter if you don’t have euros to sell the only thing that is important is to have any other currency (USD in this case) and you can enter the trade. Always in forex you buy something and you sell something so when you sell you can look at that you buy other currency.
USD is base currency but i thought that if he, for example. want to trade EUR?JPY short, then it is like going EUR/USD short and USD/JPY long, or I am wrong?
The easiest way to think about this is that you are not physically buying or selling anything .
You are making a bet on the direction of the exchange rate of a currency pair.
For example, if you think GBP/USD will go up, you buy or “go long”. If you think GBP/USD will go down, you sell or “go short”.
When you go short, you’re speculating on the direction of the exchange rate of GBP/USD that it will go down.
You’re not purchasing USD. What happens is that when you click “Sell”, you enter into an agreement on your trading platform at price X, and when you close the trade at price Y, if price Y is lower than price X, then you get paid the difference (gain). If price Y is higher than price X, then you pay the difference (loss).
If you wish to go long EUR/JPY, you can create a synthetic position by going long EURUSD and long USDJPY simultaneously but it’s not necessary. You can simply trade EURJPY if your trading platform offers it.
