I’m brand new to this site and it has been a great help. One thing I am not clear on is how pairing works for trading. For example, is it the case that if you are dealing with GBP/USD you buy USD with GBP for example and wait for the exchange rate to climb, then sell back the USD to gain GBP, thus making your profit?
I thought it was more the case that you may buy USD using GBP, then go buy for example CAD with those USDs you just got and make yoru profit that way? Can you not do this? Buy a currency, then sell it into another? Does a broker restrict you to EUR/USD for example meaning if you buy USD with EURs then you can only use those EURs to buy USDs and nothing else?
When trading pairs you, the first on the list, ie eur/usd is the part that you refer to when trading so if you buy the euro you are expecting the usd to go down compared to the euro. So if you thought the dollar was going to get stronger you would sell the euro.
Sure, but when you the euro does your broker say ‘ok I’ll wait for you to come back and sell them to get euros’? Can you
ONLY use those euros to buy dollars now? Could I sell euros to get dollars, then with those dollars buy francs?
Buy and sell doesn’t work like that in forex. In that case it would be up trended. When you think when EURUSD is gona go up you open a BUY order (not buy anything) and wait for it to rise, if so you close it and take your profit; but, if you think EURUSD is gonna fall, you open a SELL order, wait for it to fall, close the order and take your profit.
In other words when you open a BUY order you are borrowing EUR to get USD expecting EUR rises or USD falls. And when you open a SELL order you borrow USD to get EUR expecting EUR fall or USD rises.
Most newbies (me included those days) belive that can only profit when pair rises. This is not like stocks, stocks have absolute values, from zero up to any value, it can rise indefinitely but cannot fall under 0, but with pairs it has not top nor bottom.
In case of AUDUSD you gonna find it with some brokers as USDAUD, so the buy/sell orders are just inverted.
For making it easy for you: whatever order you make you are buying a contract not a currency, when you open a buy oder you buy a positive contract, whe you open a sel order you are buying a negative contract.
Maybe if you have 100 000 usd and in that case you wouldn’t need retail nor leveraged brokers. It does not work like that. Retail FOREX is a derivative market relying over the currency market, forex is a futures market. You are not buying real currencies, you are buying contracts (negatives or positives) expecting that they are going somewhere (expeculation) based on the future value of one currency against another. The only way you can buy real currency is via a bank or an exchange agency but the process would not be as fast as forex and the spread would be higher and you wouldn’t get charged/paid with rollovers. These are concepts not so easy to understand.
Imagine you have an ordinary bank account in USD and you decide to open another one with the same bank in EUR. So you can pass funds from one acc to another with the exchange rate at the moment, so you can see the balance one in usd and the another in eur. So you go and deposit usd cash in your eur account, the bank makes the conversion for you, you watch the balance of that acc and you will see in eur. So the questions is, are you seeing real euros? No, not a single one, is just the bank makes it it worth like it was, maybe if you go phisicaly to the bank and ask a phisical withdrawal in actual euros the bank will provide you the paper money of that courrency but that is a different story. That is how forex works.
Understand this basics concepts and you’ll be one (just one) step ahead of most traders.
The money in your forex account is not used to buy anything, the broker buys it for you, your funds are only to cover the losses. The broker purchases for example 10 000 usd for you and the fluctuation of that is charged from your account in case of a loss. In case of profiting it is charged to your account, but the broker keep its initial purchassing plus the spread that charges from the whole operation. Remember this: broker always win wether you gain or lose.
Ah that makes a lot more sense now. i thought you were actually buying the currency and holding it, then waiting for the currency to move up or down. yes, understandable now.
But Mr.Gone, can you explain more specifically what you mean by
So the questions is, are you seeing real euros? No, not a single one, is just the bank makes it it worth like it was
Do you mean in terms of the physical transfer of funds? i.e You pay USD into your EUR account but all that happens is a few digits on a screen change? How is that how forex works?
Exactly that way it works, the broker has a liquidity provider who passes funs from one acc to another and sells the operation to the broker and the broker re-sells it to you.
Just as a homework, search for these type of brokers: ECN, STP, market makers, NON Dealing Desk.