Hi @sotdumm
It’s important to understand there is a difference between physically exchanging euros for US dollars (as a foreign traveler or international business does) and speculating on the EUR/USD rate.
When speculating on the rate, you do not physically exchange one currency for another, because doing so would add unnecessary expenses to your trading costs and eat into potential profits.
Forex brokers let you trade any currency pair they offer regardless of the currency denomination of your trading account with them.
For example, suppose you have a British pound-denominated trading account with FOREX.com and want to trade EUR/USD. The bid price and ask price in your example, were unrealistic, so we’ll use the following instead.
- Bid price: 1.1650[0]
- Ask price: 1.1651[3]
That means the spread is 1.3 pips
- You can buy one standard lot (100,000 units) of EUR/USD at 1.1651[3]. That means you can buy 100,000 euros at a price of 116,513 US dollars.
- You can sell one standard lot at 1.1650[0]. That means you can sell 100,000 euros at a price of 116,500 US dollars.
The 13 US dollar difference between the price you can buy and the price you can sell reflects the bid-ask spread, which is 10 US dollars per pip on a standard lot. If you have an open position of one standard lot, then every time the price changes by one pip, your profit or loss will change by 10 US dollars.
However, FOREX.com will display this profit in terms of your account currency, which is British pounds, based on the current GBP/USD exchange rate.
- For the purpose of this example, let’s assume GBP/USD is trading at 1.2900[0].
- That means 10 US dollars would equal about 7.75 British pounds.
Therefore, every time the price changes by one pip on your trade of one standard lot trade of EUR/USD, the profit or loss in your British pound-denominated trading account will change by about 7.75 British pounds accordingly.
The fact that you are not physically exchanging currencies in order to speculate on the rates also explains why you can short EUR/USD (sell the rate to seek a profit from a price drop) in a British pound-denominated account, even though you do not physically hold any euros (or US dollars for that matter).
Your balance will always remain in the same currency you started with to open the trading account.