My question concerns spreads. I know this is in the school but I’m not sure if I understand it right. Please let me know which, if any, scenario I have wrong.
Scenario 1: I go long on the USD/CDN pair. With Onanda, right now the spread is 5 pips. I buy this pair and right off the bat I lose 5 pips. Now, later I wish to short this pair and bring this wealth back to my Canadian account. I again lose another 5 pips when I sell. So a roundtrip from Canadian funds to US funds, and back to Canadian funds, costs me 10 pips. So if I sell it at 10 pips higher than I bought it, I make no profit, I break even. For a 10 pip profit, I need to sell 20 pips higher than I bought it?
Scenario 2: Now what if I chose to buy a USD/EUR. Since my account is in Canadian dollars, does this mean in essence the trade automatically has me go long on the USD/CDN pair (pay 5 pips) and then immediately short that pair (pay 3 pips), in favor of the Euro, for a total initial loss of 8 pips? So would a one way trip from my account in Canadian dollars to the USD/EUR pair actually involve two trades and two spreads - Long USD/CDN, followed by Shorting the USD to buy the Euro, which would be called going long on the EUR/USD? So in actuality I go short on the CDN dollar, then go long on the US dollar, then go short on the US dollar, and then go long on the Euro? So really, four sides of 2 trades? Would that also mean that a return trip back to Canadian dollars would be double that - 4 trades, 4 spreads and a total of 16 pips just in broker fees?
Okay, with my oanda platform, the price it tells me I would get if I was to short the pair is the lower of the two prices shown - the bid price, which right now is 5 pips lower than the actual price on the candlestick. So don’t I lose 5 pips there? Wherever the price is at the moment, it always shows me, in the quote window, a price 5 pips lower. When I bought it, I also bought it at a price 5 pips higher than it was trading at when I pressed the submit button.
every trade you open starts as a losing trade. that´s spread and that´s what you pay to your broker to use them services.
you only pay the spread for a currencie pair, no matter what your account currency is the spread is the same.
if you buy me a aple for 5$ knowing that i only will pay you 4$ for it if you decide to sell it back to me, you will lose 1$ per apple… unless the price of the apple go up:D
To make myself more clear, whenever I buy a currency pair, the platform I am using always sells it to me at a price higher than what it is actually currently trading, so I am immediately in the red. And, when I sell this currency pair, I am forced to sell it back at a price that is lower than what it is currently trading. So I am dinged coming and going, no?
Your question is confusing and I don’t even understand it, but this is how the spread works in one single trade.
Say a pair has a 5 pips spread and you go long: [B]You only pay the spread once. When you enter the trade. You don’t pay it again when you exit.[/B]
Upon entry you are automatically -5 pips, and that is if price does not move any pips after entry. You are paying the spread now, and done paying the spread regardless of if you win or lose the trade.
If price moves only +5 pips long from entry, your trade will now show, “0,” under profit.
If it moves +10 pips from entry you’ll show a “+5,” pip under profit. Basically you have to beat the spread to go into profit, but you only have to pay it or beat it once.
Reverse that for a trade going against you. And that is very important point, particularly if you trading for small pip gains and use tight stops.
For instance: 50 pip SL - 5 pip spread = from entry price only has to move 45 pips against you to be stopped out. So, you can see why scalpers are looking for pairs with 1-3 pip spreads.
I see, I think I know the problem. You are watching candles right. Thats the difference between the bid and the ask. The candles are painted by the bid line, you buy at the ask, which is higher than the bid because of the spread.
The usual default on mt4 is to only see the bid line. If you right click on the chart and go into properties you can check a box to see the ask line as well. You’ll often have to zoom in to see both lines particulary if the spread is small.
Think of it this way, each pair in reality has two prices, one to buy it and one to sell it. The spread is the difference between those two.
If I don’t pay the spread when I sell the pair, how come my platform never gives me the current price for the pair, but a price several pips lower, when I short it? For example right now the USD/CDN pair is trading at 1.04896 but if I close out my trade at this moment, I am not paid that price. I am paid the price of 1.04946 - that is what the Oanda platform calls the SELL price - which is again, 5 pips.
You pay the spread wether you long or short, but you only pay it once regarless if you are long or short.
[B][I][U]Just set your platform to show both the bid and ask line and zoom in until you see both price lines. Watch it paint candles on the 15 m chart or lower, then you’ll understand.[/U][/I][/B]
After you close a trade look at the price you opened and the price you closed. If you watched the candles move in your favor 20 pips from when you open to close and the spread is 5 pips the difference in your open and close prices should be 15 pips. You made 15 after spread.
EDIT…
I don’t think this is the case but is it different if you close a trade(click on the trade and the little window pops up and you hit submit) or open an opposite trade to close out your position?
You need to stop thinking that there’s one “correct” price for the pair. There are always two - the bid and the ask/offer. You will always sell at the bid and buy at the offer. If you are long, your’re going to exit at the bid, so that’s why it shows in your P&L. Similarly, when you are short you will exit at the ask, so that shows.
Also, you’ll want to start working on your terminology. The C$ is CAD, not CDN. The exchange rate between the US$ and the euro is EUR/USD, not USD/EUR.
Okay, I think I understand my confusion with regards to Scenario 1. Thanks.
Now, about scenario 2, if I buy a currency that is not paired with my own, is this two trades and two spreads? For example, I am demoing the GBP/JPY pair right now. So to go long on this pair means I am buying British pounds but with Japanese Yen. But I don’t have Japanese Yen, I have Canadian dollars in my account. So to go long on this pair, I have to first redeem Canadian dollars for Japanese Yen, then redeem that for British pounds?
When I close out this position, when I short this pair, that means I am selling British pounds for Japanese Yen, and then selling Japanese Yen for Canadian dollars?
Thanks Rhody. However, I’m still not sure I understand this.
If I close out my position, say on the GBP/JPY, what happens to my money? Does it go back to my account? As I understand it, if I close my position, that means I am shorting the pound in favor of buying Yen. But that would mean I would now be holding Yen, which would mean I would still have a position in the markets. But that is not what happens, right? That Yen gets converted back to the currency of my account, which in my case is Canadian dollars. However, if that is the case, wouldn’t I be paying a spread to go from Yen to Canadian dollars? Yet, I don’t see that reflected in my account anywhere?
Maybe think of it this way. When you buy a pair, you are buying the first currency with the second currency which you [B]borrow from your broker[/B]. The margin is the amount of your deposit the broker holds while the trade is open to cover the loan. When you close the buy order, you sell the first currency to pay back the borrowed currency …the pip movement and lot size is calculated with the exchange rate the broker gives you and depending on how the trade went, works out to either a profit going back into your account, or a loss the broker takes from your account.
When you short a pair, you are borrowing the currency of the first pair …from your broker… to buy the currency of the second pair. When you close, you pay back the borrowed currency with the second currency, and again the exchange rate the broker gives you is calculated, on the pip movement & lot size, and your account is updated with the result.
That’s why it doesn’t matter what currency your deposit account is in when trading… it only matters when it comes to the exchange rate the broker gives you per pip per pair. The exchange rates in my US demo account are much different than the exchange rates in my Canadian account.
