Question about selling and buying

Beginner Questions
1

Hey,

i have a quick question that is unclear still for me. Lets say i have the EURUSD pair. if the ask price is 1.4 and the bid price is 1.5 that means i get 1.5 usd for 1 eur?
And also if I ‘sell’ the pair does it mean i get usd from eur or means i get eur from usd.
please help me with this noobie question!!

2

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.

3 Likes
3

Great clarifying post!
Since there is no physical holding of the currencies does that also mean that no swap or rollover fees are applicable when keeping positions open overnight?

1 Like
4

Hi @TTH,

Swap/rollover rates are applicable for the same reason profits or losses resulting from any movement is the exchange rate are applicable. Even though you do not physically exchange your currency for another, you are still speculating on (taking risk on) positions in other currencies including the associated swap/rollover rates.

Since you refer to swap/rollover as a fee, it’s worth noting that it’s possible for you to earn swap/rollover interest instead of paying it, when you are long the currency in the pair that has the higher interest rate. We explained this in more detail in this earlier post: Can someone explain to me what rollover interest is?

5

Okay I get it. Many thanks