I use euro currency, so for example I go long on USD/CHF on a 1k contract. USD/CHF goes up 10% and I close the position, do I really get 10% (100€) or it depends on the EUR/USD and EUR/CHF pairs?
I tried to look it up on babypips but I didn’t find it… Anyone minds explaining? I don’t know if I can trade pairs without euro in it because of this, I don’t want to look at 3 pairs just for 1 trade lol…
Your final profit will be determined by the currency conversion back into your home currency. So in USD/CHF you will make or lose CHF, which then get converted back to EUR via EUR/CHF. This will not impact whether you make or lose money on the trade, only the size of it.
You can think of you P/L in either USD or CHF terms and convert your gains/losses back via either EUR/USD or EUR/CHF. It doesn’t really matter because of the triangluar arbitrage between the three pairs (USD/CHF = EUR/CHF divided by EUR/USD). The result will end up the same.
This will not impact whether you make or lose money on the trade, only the size of it.
So if USD/CHF is 1 and goes to 1.1
And EUR/USD is 1 and goes to 1.2
I buy $1000 with 1000€ (rate of eur/usd is 1). At the end I get $1100. When I do the exchange from USD to €: $1100/1.2 I get 916€. I actually lose with this trade, using this logic. Is this correct?
No. When you trade you don’t actually do an exchange. You are entering into an agreement to do a future exchange, which never gets done because you keep rolling forward. The only conversion that takes place is your gain/loss.
So, if you’re go long USD/CHF at 1 and it goes to 1.1, you’ve made 0.1 CHF. Convert that at the existing EUR/CHF rate to get your final profit.
I see. So maybe it’s not very smart to trade pairs that don’t have your currency in it, since you can’t really control your risk because you can lose more than expected. But I see many people doing it, why
Well, you can always try to account for potential contrary action in the conversion cross, but it probably won’t make much difference. In the short term you won’t see big % moves and even if you’re playing longer-term the impact is likely to be minimal. Consider a position where you’re risking 2% of your equity on a trade. If the conversion cross goes against you 20% (a REALLY big move) then you’re risk becomes 2.4%.