What if I trade a pair that doesn't have my currency in it?

Beginner Questions
1

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…

2

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.

3

But when I’m going long on USD/CHF, am I not going long on USD and short on CHF? So in that case both EUR/CHF and EUR/USD should matter… :confused:

4

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.

5

Ok, but then I don’t understand when you say this

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?

6

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.

7

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 :confused:

8

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%.