First post, sorry for jumping straight in with a question and possibly a crazy one at that!
I am new to Forex trading and I have gotten myself very confused. I’m having trouble understanding the most fundamental thing. What actually are you buying when you ‘buy’ a currency pair? I have read quite a lot about this and I feel no one has explained fully (or even really attempted to) but I could just be stupid. Most places try to explain that you are exchanging currencies but that is definitely NOT what is happening.
I was having fun playing around with a free account but I’m a programmer and I wanted to backtest the basis of my strategy so I started writing some code. Doing the maths is when I discovered I had no idea what is actually going on.
Let me give you a concrete example and show you what I naively thought was happening:
I have an account in GBP with 1000 GBP in it.
I decide use the symbol GBP/USD which is trading at (lets pretend for simpliciy) 1.4
So I make a market order for 1000 units of GBP/USD.
IN MY MIND I have just spent 1000 GBP buying 1400 USD.
I wait till GBP/USD is trading at 1.3
Now since I have 1400 USD and the exchange rate is now 1.3, doing the maths I can buy back 1077 GBP for my 1400 USD.
So IN MY MIND I SHOULD make a market order for -1077 GBP thereby getting my original stake back with a profit of 77 GBP.
THIS IS TOTALLY WRONG.
When you actually do this you open a position by making a market order for 1000 GBP/USD. Then you close the position by making a market order of -1000 GBP/USD. If this was simply currency exchange then by making a market order of -1000 all I have done is buy back my original 1000 GBP, no profit, its the same sum, 1000 in 1000 out. So where is the profit??
So I read on babypips course and I see:
You are not using your balance straight away.
You are not buying a currency you are buying a contract of a currency pair.
So with my naive version I had an imaginal image in my head of monopoly money changing hands, now I have no image of this… contract (is it always a CFD? Does an actual currency exchange exist in the world?), I don’t know what it is I am buying and selling and if I can’t picture it then I can’t operate. I need an image.
I asked my friends who also do some forex and their response was “I don’t understand how its possible that you DON’T understand?!”
I want to understand mathematically and physically what you are actually doing when you are opening a position in the real world and what has changed hands, what thing is owned? What info is recorded in some digital ledger in some bank somewhere somehow? What I need is an image.
Sorry if this is a stupid question and many thanks for your time reading this even if you don’t respond.