The concept of trading makes sense to me. You believe an asset or currency will either go up or down.
For stocks, say for example I buy 1 share of ‘xyz’ company for $10. Then, tomorrow comes and ‘xyz’ is worth $15 now. I decide I want to sell my 1 share of ‘xyz’ company for $15. This means someone else across the internet purchased my 1 share of ‘xyz’ company for $15.
I picture the transaction in my head, as if it’s the old days and I had to physically go to a brokerage and buy the share for $10, and now I have a slip of paper of “xyz” company. And then the next day I walk to the brokerage and sell that 1 share, and now I have $15 in my hand.
Now with how would I envision this with a forex trasnaction?
say I am clicking “sell” EURUSD at 1.0800 with 1 standard lot. Then tomorrow comes and The spot price of EURUSD is 1.0700 and I decide to close my position with a +100 pip profit
. Was I selling a contract of “EURUSD”, or was I selling USD, or buying EUR?
How would the transaction of “sell” EURUSD at 1.08 and close at 1.07 look like if it were done in person?
Thank you in advance.
P.S. I’ve been on and off trading for almost a year now, but this question no one can seem to answer. I appreciate your help.
Forex: Someone takes your money or you take their money
Stocks: Sometimes the market maker takes the trade if there’s nobody on the other side.
Maybe how you can envision Forex is, you take a vacation to FIJI so you go to a money exchange place to exchange USD to FIJI dollar or whatever the currency is (you buy FIJI dollars using USD). You then come back from vacation but forgot you still had FIJI dollars a year later–so you go back to the money exchange to turn FIJI dollars into USD (so you can buy vintage Sony walkman) but you’re surprised you got a lot more USD and now you have extra for ice cream.
You do your research and you find that the value of USD had fallen drastically because Pee Wee Hurman was elected president.
A trade for a private retail forex trader (not a bank) is a bet. You bet with the broker that the exchange rate of currency pair XXX/YYY will go up. The broker accepts other bets from other clients that take the opposite view. This means that if the rate goes up you will receive money from the clients who bet that the rate would go down.
No currency XXX or YYY ever changes hands. We are betting on numbers, not intrinsic value.
The buy or sell is always for the “Base Currency”. In your example that is the Euro. You sold EUR based on the EUR/USD exchange rate at the moment of the transaction. The base currency is the first named and the “Quote Currency” is the second named. In your example that is the USD. Your visionong of the stock transaction is the same for Forex. In Forex there is always a buyer for your sell transaction or a seller for your buy transaction.
Thanks for that explanation! So if I bought “EURUSD” on metatrader4 for example, that means I just exchanged 100,000 units of euros at whatever the spot price is, say 1.06. So now I have $106,000 USD.Then when I decide to close my trade, and now EURUSD is 1.09 I would have made a profit. But in the example, in my hand I have $106,000 and the the new spot rate of eurusd is 1.09 and if I were to convert my usd back to eur I would be at around 97,000. That would put me at a loss.
say GBPJPY is 130.00 and you believe GBPJPY will go up to 150.00 (because of your analysis)
So I enter “buy” GBPJPY at 130.00 with 1,000 units (0.10 lot size)
at the moment I click “buy” here is gets executed instantaneously: I am BORROWING 1,000 units of JPY and immediately converting it to GBP.
at the spot rate of 130.00
I now have 7.69 GBP. This is calculated by converting my 1000 JPY into GBP. from 1/ 130 (GBPJPY rate)
1000 yen x (1/130) = 7.69 gbp
So, you now have 7.69 GBP in your pocket.
Now let’s say your analysis was right, GBPJPY went from 130.00 now to 150.00.
You exchange your 7.69 GBP for yen at a conversion rate of 150.00. it’s calculated by taking 7.69 x 150 = 1,153.85 yen
I’m either psychotic or finally figured it out
what do you think?
you started with 1,000yen and now have 1,153.85 less swap fees and commissions.
Look, I’m going to say this once more for you. When you “buy” GBP/JPY you have placed a bet that the exchange rate between these two currencies will go up. In fact you have not bought anything. Neither have you borrowed anything.
You have simply agreed with the broker (who does not even own any GBP or JPY) that if the price goes up they will pay you some money and if it goes down you will pay them some money.
I’m sorry if you don’t like the idea that you are betting - but you are still betting.
Why do you need to think about this so deeply? Lol. There’s a lot of conversion done for you by the broker.
Can’t you just go: buy GBPJPY at a certain price (say 130.00, which means 1 British Pound buys 130 Yen), so if the price is above the line, you’re making money and below the line, you’re losing money?
Do you have MT5 or MT4? The exposure tab in the toolbox, I think, can show you what happens when you buy GBPJPY (just make sure you use a demo account before you “buy” GBPJPY).
You will see that you would have bought GBP and at the same time, sold JPY–in your account currency.
Here’s an awesome explanation and if it finally makes sense, you can buy me some coffee when we meet in person (which is probably never, so rejoice!)
Thank you, this has made more sense. I’m pretty sure I understand it completely now.
When I click “buy” say on EURUSD 1.06, with 1 standard lot… What I am doing is I am borrowing $106,000 (B/c that is the spot price of eurusd) and buying 100,000 euros.
At that point I am now in a position.
Now say tomorrow comes and EURUSD is 1.09. I close out my position, which means I re exchange my 100,000 euros for $109,000 and pay back what I owe (From borrowing) which is $106,000. So then my profit is made in the differnece, 109,000 - 106,000 = 3,000.
Forex and stocks are completely different scenarios. Forex are pairs of two currencies includes buying and selling whereas stocks are more of a like single unit investment. So, it is not fair to say forex like stocks.
When we trade forex we are not buying currencies or selling currencies. A forex pair is not a two-unit investment, its not an asset. A position on a forex pair exchange rate is just a bet with the broker, its not ownership of anything.
the main difference between a stock market and Forex is that trading in a Forex market involves simultaneously buying and selling currencies whereas trading in a stock markets requires either buying shares in a stock or selling shares in a stock…
One of the differences is that stock market requires you to track only your domestic market while to trade forex you will have to keep track of events in the global economy (mostly the economy of the two countries whose currency pair you are interested in trading and their relation to the world economy)
