Say that my country’s currency is GBP, I would guess the normal thing to do is to trade GBP related pairs such as GBP/USD and GBP/JPY for example.
But what if I want to trade USD/JPY pair, do I need to pay some sort of conversion fee to have USD to be able to trade it? If so wouldn’t the fee eat into a lot of the profit, making it less profitable; in turn making me not to want to trade anything that doesn’t include GBP?
Or are there some sort of services provided by the broker that allows cheaper trading?
Pairs have both a base side and a quote side, USD/JPY, USD is the Base and JPY is the Quote. Depending on the current price of each you get an exchange rate that your PIP is equated to.
Thank you for the reply. I have read through all of babypips course already, and the link you have included explains if your account denomination is in the base or quote currency. But it doesn’t seem to talk about what if my account currency is difference from both the base and the price.
Before I spend ages explaining this, i’m sure as damn it that @clint has an exception post on this exact question from the past. I’ll try and dig it up if he doesn’t get back.
Thank you for the reply, I’m aware of what a pip is, but I don’t understand how it’s related to converting from GBP to USD if I want to long the USD/JPY for example.
Your trade positions are valued in the currency in which your account is based, presumably the currency of your home country. Remember that when you take a long position on e.g. USD/JPY, you are not asking the broker to go and buy USD and for them to sell JPY to get them. They are not storing a box of dollars waiting for you. You are just placing a bet with your broker that the USD/JPY exchange rate will go up, not down.
Same as if you live in London and put a bet on a horse that’s racing in Hong Kong. You will place your bet in GBP and you’ll get your winnings in GBP, and no Chinese currency will be involved.
I found another reply on forexfactory with a similar reply just a few minutes ago too, and it’s in line with what you wrote: “You don’t need to hold a currency to short (sell) it, and it doesn’t really make much difference which currency your account is denominated in. If you sell AUD/USD, you are basically ‘borrowing’ Australian dollars and temporarily converting those borrowed aussie dollars into US dollars, in the hope USD will rise or AUD will fall, at which time you convert that money back into AUD and flatten the position making a profit. The euros you deposited in your account is like collateral for this trade, just in case it goes against you.”
Although I agree with this from a retail point of view, which essentially is what we are dealing with, I wanted to dive into the maths behind what would actually happen if you were a market participant. I know that in most instances we place “bets” with our broker, but I still think there is value in understanding the conversion of rates that would take place under real trading circumstances.
Again, i’ll find the post i’m referring too as I remember it to be very well written and with detailed examples.
I originally thought that to trade you need to either owe the currency or short, and I was confused about if I short a foreign currency how would I pay it back - do I need to buy a the foreign currency. It turned out to be the difference in pips earned converted back to your own currency with the broker; fluctuating pip-values was the missing piece of the puzzle it seems.
Thank you for digging through his comment, it’s much appreciated.