I’ve been studying forex for 4 weeks now, so I am not even a newbie.
I couldn’t find an answer to this question during my study :22:
When a trader buys GBP/USD in the UK where obviously his account currency will be theGBP, how does he buy the base currency GBP with GBP ? Does the broker sell him USD first in order for the trader to sell the USD in order to buy the GBP, just buying GBP with GBP messed up my head.
Similarly if the account currency and the base currency are different, what are the transactions involved ? Say a trader in Paris wants to buy GBP/USD with his euros ?
Lastly, if the account currency is the same as the counter currency what are the transactions involved ? For example a trader in London wants to buy the pair EUR/GBP.
Many thanks for your patience with the newbie world
Well, lets first say that where you live is not a matter because you are specifying your currency while opening an account with a broker and. Secondly, in retail Forex world you are not actually buying or selling any currency rather betting on a currency against another currency for the expected performance you feel. The term buying or selling is used to simplify things.
Hi Newpips, your question is good, you are trying to understand the mechanics, big time important.
First look at the ‘majors’, and think in terms of each individual currency and not in terms of ‘crosses’. These crosses are in a sense artificial.
Just chosen at random - Japan have an energetic PM, some refer to him as nationalistic, he is very focussed on sorting Japan’s problem with deflation, his aim, through ‘Abenomics’ (guess his name, maybe google it) is to get inflation up to around the magical 2%, so he needs to stoke the economy.
Low interest rates and money printing (QE etc) are things that stoke inflation, higher import prices (via a lower currency value) also help. It also happens that lower interest rates and QE help devalue a currency.
Abe set his stall out early in his election campaign, so when he won - the market expected.
The market also delivered, it always does, look at a daily chart of say Eur/Jpy or Usd/Jpy to see how it delivers.
Add to the mix, the US fed say’ Hey, it’s time for us to quit this programme of US QE’ figure what will happen the USD crosses. - Then add even more, suppose that Australia are reporting a downturn, suppose that business confidence is waning, maybe unemployment is rising - then think whether to buy USD with your (imagined) AUS - you are ‘selling’ the Aus to ‘buy’ the Usd.
