Trading currencies that dont match your base currency?

Beginner Questions
1

Quick question: (again) How does trading currencies that arent part of your base currency work?

Example:

im looking to trade on the EUR/USD market, So if I click the long button and purchase 1000 units of Eur/usd.

What happens?

Do i buy units on the eur/cad market? paying the spread for the eur/cad, and my gains and losses are depicted by that market?

Or, Do I buy usd units on the usd/cad market, paying the usd/cad spread, then make a second transaction on the eur/usd market, and paying that second spread?

Or am i completely wrong and things operate in a completely different fashion?

2

when you trade the EUR/USD market you trade in EUR/USD contracts. It’s really that simple.

3

Sorry, i left out something important in my main post, must have deleted it by accident.

Assuming my base currency is in CAD.

If my base currency is CAD, how do i go long on eur when i have no usd?
Is there not some sort of conversion there?

4

You’re seriously overthinking this.

Yes, there IS a conversion, but it has NO bearing on anything but price per lot, and pip value.

The only extra charges you are likely to incur, are larger spreads, and higher swap rates should you hold a trade for an extended period of time.

Your broker’s platform calculates all that in when you open a trade. All you gotta do is keep an eye on the bottom line :smiley:

5

you have to understand that you’re actually just buying and selling contracts. There is no real exchange of EUR to USD to CAD. You buy the contract if you think price is going up and you sell the contract if you think price is going down.

Your profit and loss are updated in real time by your broker ALWAYS in your account currency.

6

The first thing that confused me about Forex was the exact thing the OP talks about.

I guess it’s intuitive for us newbies to take the line “when you buy a pair, you buy the first currency, and sell the second” to heart.

This leading to some confusion when the currency in your wallet is not part of the pair.

So, OP, I can feel your pain :slight_smile: But also, you’ve received good answers here.

7

Thanks guys,

babypips has really helped me understand exactly what this forex beast is, as well as given me my best chance at actually seeing success on my second attempt at forex trading.

My first account of $1000 i started about 2 years ago and it blew up in about 1 month. I was focused too much on how much profit, a slew of technicals, as well as how much i was making per day and had no concept of money managment.

I got up to about 1600, but then had a few beer one friday, went to bed, then woke up with a margin call. After that i proceeded to trade with higher and higher leverage until my balance was less $20 (the cost to withdraw)

I decided if i was to re-enter, i would first understand every little detail about forex trading, how the platform works, well as money management, as well as use a demo account until completely comfortable with whats happening with my account and the knowledge of why its happening.

So far my current demo has lasted about 2 months and im up 10% overall
Huzzah!

Good luck with your trades everyone!

9

Yep. Don’t overcomplicate it.

10

I’m gonna illustrate my current, newbie, understanding of the matter, using EUR/USD, with a CAD-based account, as the example.

  • Let’s say EUR/USD = 1.3000, USD/CAD = 1.1000, EUR/CAD = 1.5000. Let’s say I want to go long EUR/USD, with a standard lot (100000 units).

  • My trading platform calculates 100000 EUR = 150000 CAD…

[I]- Here’s a question. 100000 EUR = 150000 CAD because EUR/CAD = 1.5000.

Since USD/CAD = 1.1000, 150000 CAD = 136363.63 USD

But this is incompatible with the EUR/USD rate, since 136363.63 USD = 104895 EUR =/ 100000 EUR.

So I guess my made-up rates don’t make sense, and that the exchange rates of different pairs are interdependent, so that these “equations” are equivalent?

Let’s continue assuming I understand this part. :p[/I]

  • 150000 CAD (assuming no leverage is used) are set aside in my account, in order to go long EUR/USD.

  • Now several things can happen:

. If EUR/USD climbs to 1.4000, my 100000 EUR are now worth more USD than before. So after selling the pair at this higher rate (this is what’s called closing my position, right?), and after my platform automatically converts the USD to CAD, I end up with a profit, in CAD.

. If nothing happens to EUR/USD, but USD/CAD drops, I still make a profit, because of the better conversion rate at the end of the trade, even if I sell the 100000 EUR at the same rate I bought it (not taking spreads into account).

. Likewise, I lose money if EUR/USD drops or if USD/CAD climbs.

…Sure lots of other things could happen. These were just examples.

So, am I understading this correctly? I’m finding technical analysis way more easy to wrap my head around than this :o

11

You guys make this SOOOO damn complicated.

Bottom line, if the E/U doesn’t change REGARDLESS of the U/CA changing, you make NO MONEY.

If the Euro CLIMBS against the dollar while you are in a buy, you MAKE money, no matter WHAT the U/CA does during the same time.

If the E/U DROPS while you are in a buy, you LOSE money no matter what the U/CA does in that time frame.

Your trade is based solely on the difference between the E/U, and is NOT affected should the U/CA drop, or climb.

(all correlative things being equal we know that if the U/CA is climbing, the E/U is most likely falling)

Your conversion happens at the ENTRY of the trade, and remains at that price until the trade is CLOSED.

Your NEXT trade may have a slight difference in trade margin due to changes that happened since your last trade, and your new one.

When you buy into a cross pair not involving your base currency, the ONLY thing in your account that has bearing are the amount per trade in margin, and the swap fees.

The swap fees are affected based on the interest rate differential between the currencies involved.

13

“soo damn complicated” is my middle name lol…

My original reason for opening this thread was to determine if that when you deal with a currency that isnt your base currency, if you pay the spread on margin amount or on the contract amount.

But after the discussions, it seems that the spread is just on the margin amount (it seemed that if it was on the whole contract or leveraged amount that it would add up to a reasonable amount?)

I liked the idea of thinking in terms of all accounts being in usd, but the currency was just displayed with the alternate price.

14

Alright…so no matter what my account currency is - when I enter a trade, only the changes in the exchange rate for the pair I’m trading matter to me?

Because I opened a thread about this same subject a while ago…and Master Tang said this:

So I’m even more confused now :confused:

Sorry, and thank you for your patience, lol.

15

The following is from Investopedia.com:

"Just because they have U.S. dollars doesn’t mean that they are limited to trading currency pairs that include the U.S. dollar. American investors are still able to trade on cross currencies, they just have to make two trades instead of one.

Assume that an investor with an account denominated in U.S. dollars wants to buy the Japanese yen against the British pound. To do this, he or she would have to trade the GBP/JPY currency pair by purchasing British pounds with U.S. dollars. Once this trade is complete, the investor can then use the British pound to complete the trade on the GBP/JPY currency pair. Because two trades need to be completed, the broker calculates a margin for both trades and adds them together. To avoid having to do this, brokers will often accept margin deposits in foreign currencies such as the British pound.."

Is this why trading pairs that don’t include your account currency works, with no additional costs, and no additional exchange rates to worry about?

16

Correct.

The only thing that fluctuates, is the margin it takes to ENTER the trade initially. That happens because of conversion rates from your base currency, to the cross pair you are trading.

To clarify my other post, if you bought a position on the E/G, and the euro climbed against the dollar, and the pound dropped against the buck, you would be a winner.

Point being, most cross pairs are extremely sensitive to the fuctuations of their individual USD relationships.

17

Alright…I think I’m close to understanding this…Finally!

Let’s say my account is in USD, and I want to enter the EUR/GBP market.

After I’m IN the market, I can concentrate solely on the EUR/GBP rate, as only that will affect my profit/loss.

The EUR/USD and EUR/GBP rates only matter BEFORE I’ve entered the market, because they affect the margin it takes to enter the trade, if I’m entering with a USD account.

Is this correct? (hopefully it will be :p)

18

Yep, correct.

Even if your base currency was Canadian buck, yen, Aussie dollar, none of that matters once you are in the trade. The conversion has happened, and your account will only move based on the cross you are trading.

19

Whats being said above is in your Euro account to buy $Cad, the E$ xrate wont matter much because it applies to your account at 1:1 levg, while it applies to your position at 100:1. In the end the xrate to watch for every change would be the one you’re trading -$C. If E$ goes up 150p and the $C goes down 80p during your trade, then effect on your equity is more affected by the $C than it is affected by converting the won amount back to euro, for the amount of equity involved in the position not whole acct. Its rather 3D, but dumb simple when you lay the math down in pencil might do that for you if you still don’t get it.

20

The following extract is rated E/OE, reader discretion is advised.

Given U$d 1,000 acct equity, and EurUsd=1.3380, eG=0.8440: to trade EurGbp chart.

To buy 1micro lot of EurGbp, Eur 1,000 worth, one needs e1,000x1.338=$1,338 in the deal;
At 100:1 lev one needs $13.38 margin of the $1,000. …(i)

Place trade, make 140pips of EurGbp add/subt’ spread liberally, while EurUsd goes the other way 180p bad case scenario ignoring correlation.

e(0.0001/0.844) x e1,000 lotsize = e0.1184, see accepted 0.1?

e0.1184 x 140p gain = e16.58 …(ii)

e16.58 x 1.3200 new $ xrate = $21.88, appx 2% on acc …(iii)

Had the xrate not gone adverse and remained constant, then gain would have been

e16.58 x 1.3380 $ xrate = $22.18 …(iv)

The rate for pair traded affects in the 20s while the other affects only what 0.3? Knowing how to navigate in and out of these numbers and applying risk-return logic strictly might well save one from ever loosing an account (live or otherwise) - at the least, one can now control the fall to less than terminal velocity.

21

Very elucidating answer, thanks!

So the rates between my account currency and the currencies in the pair CAN affect my profit/loss, but their effect is small enough compared to the effect that the pair’s rate has, that I can safely worry about the latter only. Because even in this is sorta extreme example, 3 cents vs. 20 dollars is small indeed.

I have two questions.

You showed how a change in EUR/USD could affect my profit.

Would a change in USD/GBP affect me too? Or is it that only the rate of my account’s currency to the pair’s base currency has an influence, since profits are always calculated in units of the base currency?

Also, I can see that you used the EUR/GBP rate @ your entrance level (0.8440) to calculate pip value. I seem to recall that the Babypips school used the exit rate (in this case 0.8580) to calculate profits?

Thanks very much for your answers. And sorry for hijacking the thread!

22

If account is $-denominated and you’re trading EurGbp, the rate to watch is still EurGbp because it affects at 100:1 leverage. The rate of EurUsd and GbpUsd (UsdGbp) in our calculation will affect at 1:1 levg and so wont matter as such.

Turning on overthinking-mode: one would have to think correlation to see what GbpUsd/UsdGbp will be doing as EurGbp goes our way, but I refuse to overthink for 1:1 reasons. One would have to think much about it even when not in any trade and that’s not what we trade for. Just for record, in theory I think the third rate can affect both positively and negatively, but still at 1:1 so please dont think about it. But broker is concerned with entering & exiting one into EurGbp via the Euro route, nowhere does it necessitate using the $G/G$ route since were not trading GbpEur. Now turning off OT-mode.

Went and checked out the old school example on UsdChf; looks like they used the exit rate(s) to calculate pipvalue? Now you’ve got me confused too I guess its contagious. I have no idea why they opt for that but there’s consolation in approximating all pip value to .0001 & still miss the correct answer by a whisker, we’re in this for skin not hair? Honestly, I dont know yet lets wait for the next poster.