Where does the money come from?

Situation 1:

Base Currency: EUR
Pair: EUR/JPY

If I go short in this situation and price drops 50 pips I make money, obviously.

However if I go long I can't profit at all (can't even open position in theory, right? Although I just did it in a demo MT4 account and I can make and lose money in this trade.) I can't buy EUR with EUR and I can't buy EUR by selling JPY because I don't have JPY.

What am I missing?


Situation 2:

Base Currency: EUR
Pair: USD/CHF

What am I buying/selling when I go short with 1 lot?
What am I buying/selling when I go long with 1 lot?

Situation 3:
Base Currency: EUR
Pair: USD/CHF

Buy 1 lot. USD/CHF goes up 50 pips, EUR/USD goes up 50 pips, EUR/CHF stay stable. Close position. Win/loss: loss of spread...

Is this scenario correct, or do I just make 50pips profit?

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Please help me solve these issues. I thought them over in my mind and I just can't figure it out...

Thanks in advance,

PriesT9

Just see what real happens:

You want to go long in the EUR/JPY. That means you will take a credit in JPY and buy EUR with it. That's all. Because you've taken a JPY credit you have to pay interest for it (very low). But, as you bought EUR you will get paid interest for the EUR. That's more than you have to pay for the JPY. Voila, there is your carry trade.

If you close your long position with a loss, you sell all your EUR and pay back your JPY credit. But, as the EUR/JPY has dropped, either your EUR is less in worth or your JPY has risen. You have to pay back more as you got in the beginning, you've realised a loss.


If you go short with 1 lot you simply sell 100,000 units of USD and buy CHF with it. It doesn't matter what you base currency is. You take a USD credit with your EUR and buy CHF with it, that's all. If you go long in this pair, you take a CHF credit and buy USD with it.


You make 50 pips profit if you go long in the USD/CHF in this situation. If the USD/CHF goes up by 50 pips and the EUR/USD goes up 50 pips as well, EUR/CHF can't stay stable.

Regards - Xaron

Thanks you very much Xaron, you explanation made things a lot clearer for me...