I am having hard times understanding the fundamentals. Sorry if I am opening so many topics.
My question is, is the exchange rate the bid price or the ask price?
I thought it was the ask price because it shows how many units of the base currency units I can buy with the quote currency, but I know I can also calculate (by using the exchange rate) how many units of the quote currency I can buy with the base currency too.
Can I ask what the exchange rate really is and how it is calculated (if itâs the average of some other variables etc.)?
The exchange rate states the number of units of the counter currency you would receive if you handed over 1 unit of the base currency. For example, the Euro / US Dollar exchange rate or EUR/USD - EUR is the base currency. If you handed over 1 Euro to a bank, todayâs exchange rate says that you would receive about 1.0866 US dollars.
Our brokers actually charge us a bit more than 1.0866 to buy EUR/USD - that is their âask priceâ. And they give us a bit less than 1.0866 when we sell EUR/USD - that is their âbid priceâ.
The difference between the bid and the ask prices is the spread.
Most charts are set by default to show only the bid price.
The exchange rate is found by trades between the big banks and currency dealers. Its supply and demand - more supply than demand makes the rate fall, more demand than supply makes the rate rise. Our brokers use the forex marketâs exchange rates to calculate their own quoted bid and ask prices.
One more connected question please. So my account currency is SGD (Singapore dollars) and when I buy EURUSD, the used margin for this trade is shown in SGD. Is it correct to think this way,
When I buy EUROUSD, my broker first converts my margin into USD based on USDSGD ask price
My broker calculates and locks up the required margin (in USD) based on the leverage and the amount of lots
Then the broker converts the margin amount back into SGD at the USDSGD bid price and reflects it on my trading platform in SGD
So is it correct to say there is not a single exchange rate that the broker uses for the above conversions?
Ok sorry maybe I am using the wrong terminology. What I mean when I buy a currency I mean placing a buy order on the platform. So are the steps I wrote above about the conversions done between my accountâs base currency and the currency pair I am âbetting onâ correct to assume?
No, the broker doesnât convert any money into any other currency.
Its like you sit in Singapore and you place a bet on a boxing match in Paris between a French fighter and a US fighter. The bet is in Singapore and nobody in Paris knows anything about your bet. Your bet is not transported to Paris. And no matter how big your bet (your position, your trade) this will not affect how the boxers perform.
But if you picked the right boxer and he wins, you get SGD from your broker.
Letâs say I am going long 1 lot on EURUSD and the leverage is 20:1. I want to calculate the margin requirement in my account currency (SGD) manually. If I am not wrong this is how I would calculate;
âRequired margin in SGDâ = 100,000 x (EUR/USD) x (USD/SGD) x (5/100)
I assume USD/SGD in the equation above is the ask price of the broker.
Then letâs say I closed the position at a price (in EURUSD) that is 100 pips above where I opened it. Now I want to manually calculate my profit in SGD without relying on what the platform/broker shows me.
âProfit in SGDâ = 100,000 x 0.0100 x (EUR/USD) x (USD/SGD)
I assume here USD/SGD ratio is the brokerâs current bid price.
So every time I open and close a position in a currency pair that is different than my account currency I lose money to spread. Am I right?
If I am right, then I am losing money to spread twice, because I am already paying the spread for EURUSD anyway.
But my main confusion is about the exchange rate. Exchange rate is represented by one single number but there are two numbers, the bid and the ask to use for conversions. When we say exchange rate, do we take the average of the bid and the ask to end up with a single number to call it âthe exchange rateâ?
I admit I know nothing about lots. I am in the UK so I can spreadbet forex. Thereâs no such thing as lots in spreadbetting so I canât help on this one, sorry.
In reality there is not one unique exchange rate. There are quotes for people who want to trade a pair, with two prices, bid and ask - bid to sell and ask to buy. There are no conversions, it doesnât matter what currency your account is in.
I donât know if I am misunderstanding it. But does it not mean that when I open a position involving a different currency pair than my account currency, there will be conversion charges?
No. This condition applies if for example you live in Singapore and so your home currency is SGD, but you open an account in USD. You have the option to do this with many brokers. It has nothing to do with the currencies in the pairs youâre trading.
An exchange rate is the value of one currency in relation to another currency. It represents the amount of the second currency that can be exchanged for one unit of the first currency. Forex exchange rates are calculated based on the supply and demand for a specific currency. The exchange rate is determined by the market forces of supply and demand for a specific currency pair.
I can find the definition of exchange rate online I am asking about the nature of it. I will just stop asking deep questions I guess.
Like honestly, when you first started learning about forex didnât you ask yourself the same questions, like if speculators are only trading CFDs how do they affect the price movement? if CFD is only a bet between me and my broker then how come it is beneficial for big players if I get stopped out (if that really happens which doesnât really matter) If I had trillions of dollars and buy CFDs I would affect the market right, but hey I am not buying or selling any currency I am just playing a betting game with my dealer so how CFDs affect the real actual currency prices. I am a Physics teacher, when I ask students what is Newtonâs second law they will tell me F=ma, then I ask them to derive the conservation of momentum from newtonâs law, they will all look at me as if I am a ghost. Conservation of momentum and newtons second law are exact same things but are written in different forms for curriculum/pedagogy purposes.
I think CFDs are a lot more complicated than just betting on a currency pair, or all you say is wrong and we do buy and sell real actual currency pairs online just without receiving the actual physical money, otherwise really nothing taught in Pipsology makes sense
I canât say anything about pipsology. But I know we are not in the business of buying and selling currency.
There are many confusing things in forex and I was utterly confused when I started, but thatâs normal. As the old joke goes, âIf youâre not confused, its because you donât understand whatâs happeningâ. Some of the confusion is generated by the industry because they want clients to think they are buying and selling some asset which has an intrinsic value: they do not want clients to think that they are simply betting on the value of the assets.
So for example if you thought the value of Van Gogh paintings was going to rise, you could buy some Van Gogh paintings. Or you could sign a Van Gogh long CFD from an art gallery, under which they agree to pay you money if the value goes up and you agree to pay them money if it goes down. Except it wouldnât be an art gallery, it would be a broker. And CFD stands for Contract For Difference. And you would never own a Van Gogh.
A countryâs currency is valued in terms of another currency at an exchange rate. Or to put it another way, it shows how many units of a foreign currency a customer can purchase with one unit of their own currency. Example
Jane is a trader in the currency department of a large, international bank. Every day, she places trades in dozens of currencies in fantastic , foreign requests. still, to conduct her day- to- day liabilities, she needs to be apprehensive of major rates similar as the USD to GBP, or the USD to Euro. moment, she has to place one complicated trade convert$,000 to the GBP, and also the Euro for a customer who wants to transfer money between banks. First, Jane must know the rate for the currencies involved.
After conducting thorough exploration, she finds 1 USD is equal to0.75 GBP, and 1 GBP is equal to 2 Euros. Her transformations using each rate is as follows$,000 is changed for 750 GBP, also the 750 GBP is changed for 1500 Euros. Jane has fulfilled her customerâs order, and successfully used currency rates to facilitate the inflow of capital throughout the world.
