Stupid question needs answer

Beginner Questions
#1

I’ve been thru the school section, I have setup a demo account and did some trading. I have lost and I have won but there is still one thing I do not understand completely. I feel kind of stupid asking, but here I go.

If I’m trading eur/usd I understand I’m buying euros and selling dollars. If price goes up, I make money. Life is good.

However, when I go short, that is, selling euros and buying dollars, right? So, how can I be selling euros If all I have is dollars?

Thank you for your understanding

Sebastian

#2

What your account is denominated in is used as collateral for the transaction, regardless of the currency being bought or sold.

For retail traders, there is never any physical delivery of this transaction, it’s all virtual and settled net. The cash in your account is not used to actually purchase the currency, it is only used as collateral for the trade.

#3

There’s no such thing as a stupid question.

I know you’re wondering how the hell can you sell euros if all you’ve got is dollars right?

Well think of your broker “lending” these euros for you to sell.

So you sell these euros and exchange for dollars.

Then when price drops, you buy back the dollars.

Exchange the euros with your broker and give back the amount you “borrowed” and pocket the rest as profit.

[B]Example:[/B]

EUR/USD rate: 1.50

Your broker lends you 10,000 euros.

You sell it and get $15,000 usd.

The exchange rate falls to 1.25

You sell your $15,000 usd and receive 12,000 euro.

You return the original 10,000 euros to your broker.

You pocket the remaining 2,000 euros and live happily ever after.

#4

Thanks for asking this question, I was wondering the same thing!
nancyald