Basic questions about buying and selling currency pairs

Hi, I have two questions:

1.- I always read that when you purchase eur/usd, you purchase the base currency and at the same time you sell the quote currency. Well I would like to understand why. I mean, imagine I open an account with a broker in euros and I deposit 100 euros, then I decide to open a position buying 100 euros. According to the theory I am selling 136 dollars, but I didn't have any dollar in my account. Where are those dollars coming from? I didn't have them, how is it possible that I sell something I don't own?

2.- And now, if the exchange rate moved to 1.50 and I sell my open position in eur/usd, What would happen? According to the theory when you sell eur/usd you are selling euros and buying dollars, but I started my account with 100 euros and now I am getting 150 dollars instead. Do I need to change the dollars I get from the sell into euros?

Thanks!

You don't need to hold a currency to short (sell) it, and it doesn't really make much difference which currency your account is denominated in. If you sell AUD/USD, you are basically 'borrowing' Australian dollars and temporarily converting those borrowed aussie dollars into US dollars, in the hope USD will rise or AUD will fall, at which time you convert that money back into AUD and flatten the position making a profit. The euros you deposited in your account is like collateral for this trade, just in case it goes against you.

Don't over-complicate trading by trying to figure out what's happening with each currency & deposits in your account.

If the chart you're looking at looks like it's going lower in your opinion, then "short" it. If looks higher, "buy" it. You don't need to know anything else unless you're a fundamental trader.

Numbnuts that makes sense, thanks!!!!

Srt yes, I was reading a book on covered interest rate arbitrage, and it was a bit confusing.

Let's say our pair is the aud/usd, imagine that you are from Australia and your interest rates for holding Aussie dollars is 1%. Imagine that the interest rate for USD dollar is 5%. Let's say those are the interest rates for 90 days.

0.- I don't understand that. It is supposed that you receive/pay a specific interest rate if you lend/borrow, and I assume that is if I go to the bank and I make a deposit for a specific amount of time. But in the spot market, in my broker platform, if I lend, what is the interest rate? How can I know that number? Are those interest rates different to the interest rates we were talking about with my credit on the bank. I mean, in my trading platform the interest rates are applied for a specific amount of time or not?

I understand if I go to a bank and make a deposit the interest they will pay will be bigger the more time I lend the money, it is a function of time. But I don't understand where the interest comes from in currency pairs, I don't now how they are related with time. I can open a position for 1 day or for three months, I don't specify that when I open it.

Let's continue with the example:

If I hold dollars I earn 5%, but if I borrow aud I have to return 1%, so I am expected to earn a 4%.

Imagine I borrow 100 aud dollars to buy 100 usd dollars, and the exchange rate is 1:1, one aussie dollar is equal to one american dollar. (Just to make this simple)

I will need to return 101 aussie dollars.

To cover from the exchange rate risk I will use a forward for a specific date. If I would understand where the interest rates in the currency pairs come from, and when they apply it would be much more clear. I understand I will need to have a look at the forward rates to know if I can earn some money or not with this operation.

Again, I think you're getting way too complicated unless you're holding for a longer period of time.
Swaps (interest paid/received) is usually not a big difference with most popular pairs. If you're holding for longer periods of time(swing trading) then you want to calculate the swap costs/benefits. As an example, right now you'll receive interest if you buy NZDUSD so you'll have to pay interest if you short NZDUSD. Shorting 1 lot of NZDUSD now will cost $8.87 every 24 hours. Most brokers will have a calculator that will give you the costs for each pair. Oanda has one you can use (http://fxtrade.oanda.com/analysis/interest-calculator).

Well it is not me, I want to understand how people with a lot of money think. If they invest several lots they could earn a decent amount of money. Interest rate parity is one of the theories to understand exchange rate dynamics. I don't understand this "too complicated" thing.

According to that calculator all the pairs I tried had the same interest rate. Is that common? Or is it just the website is not working properly at the moment?

You need to change from "Balance" to "Trade" using the calculator.

Thanks srt.

That makes more sense.

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Question: I’m new here and I want to know how exactly do you buy and sell off of forex factory with currency pairs?

I saw a question: "Question: I’m new here and I want to know how exactly do you buy and sell off of forex factory with currency pairs?" And I'll try to answer it the way I interpret it.
Usually the financial market sells and buys, for example, stocks, indices and other instruments. Only Forex puts up currency pairs for sale. Here is how it looks: take, for example, the pair JPY/USD. You should interpret it in this way: you buy the Japanese yen and sell the US dollar. Any currency can stand in place of these currencies, and this will not affect the principle of trading currency pairs.
The most important advantage of the currency market is its convenience and availability. The currency market is international in itself and works successfully all over the world. Make transactions at any time convenient for you, 5 days a week. This fact occupies one of the main places in the list of Forex trading basics. The foreign exchange market has got rid of exchange offices, so it was possible to bring trading to a new level. You can make transactions 24 hours a day, from Monday to Friday. Besides, no matter what country you are in, you can trade regardless of the time zone. All you need is a desire, a trading strategy and an initial capital.

Sainrad, you have provided very nice explanation of what forex actually is about. Indeed, here you are earning by exchanging one currency for another and buying it back after you reach your profit target. This is actually basics of forex

I'm still confused with why I sell at the 'bid' price, but someone in the exchange buys at the ask (does my broker get to keep that difference even thought they are ECN?)

Paul, it's a bit more complicated than that. The FX market is still a market place and when you look at bid & ask prices, you are looking at opposing limit orders which represents what various buyer and seller are prepared to pay(or sell) for a position. The more active a symbol, the closer together the prices will be, and in some cases may even be the same(zero spread).

The broker/platform can only show you limit order prices ie people that have raised their hand and said they wish to trade at a price - and the reality is if the prices meet, a deal is to be done - this has the effect of removing those prices and the next available prices are what you see from then on, with their gap(spread). As the spread narrows, you get the guys that will step in with their market orders and that has the effect of eating up your limit orders, driving the prices apart again.

Sometimes a broker may take a small bite of the spread but that is not the reason you see a difference in pricing. So nobody get to keep the difference. You have done a trade and your position is only worth the next limit order price(remember, trader with his hand raised).

Hi,
I'm monitoring currency pairs to trade and I see some showing strange movements like the attached IDR/AUD below. My question is:
1. How could that happen with this pair? Checking both AUD and IDR with other currencies does not show a similar pattern.
2. Is there a good app that could provide an alert if a particular currency pair crosses a certain threshold rate? I tried many apps that claimed to do so but none actually pops any alert message.




Thanks.