{"id":3532,"date":"2024-10-23T11:58:51","date_gmt":"2024-10-23T11:58:51","guid":{"rendered":"https:\/\/apex-aiexperts.com\/?p=3532"},"modified":"2024-10-23T11:58:51","modified_gmt":"2024-10-23T11:58:51","slug":"what-are-you-actually-trading-in-forex","status":"publish","type":"post","link":"https:\/\/apex-aiexperts.com\/es\/what-are-you-actually-trading-in-forex\/","title":{"rendered":"What Are You Actually Trading In Forex?"},"content":{"rendered":"

As a retail forex trader, qu\u00e9<\/strong> are you actually trading?<\/p>\n\n\n\n

New forex traders might be puzzled about how it\u2019s possible to trade currencies they don\u2019t physically own. They\u2019re also often confused about how it\u2019s possible to sell something before buying it.<\/p>\n\n\n\n

Let\u2019s revisit a part of the earlier story<\/a> about Batman and Spider-Man:<\/p>\n\n\n\n

\n

Oh really? Let\u2019s make a bet then.<\/p>\n<\/blockquote>\n\n\n\n

\n

What kind of bet? How will it work?<\/p>\n<\/blockquote>\n\n\n\n

\n

If GBP\/USD goes up, I\u2019ll pay YOU the difference between its price right now and whatever the price is when you decide to close the bet. But if GBP\/USD goes down, you\u2019ll pay ME the difference. Payouts will be in cash. Also, you can close the bet whenever you want. What do you say?<\/p>\n<\/blockquote>\n\n\n\n

\n

Let\u2019s do it! I\u2019ll take that bet.<\/p>\n<\/blockquote>\n\n\n\n

The conversation above should give you a hint.<\/p>\n\n\n\n

\n

If you\u2019re not familiar with the story above, this means you haven\u2019t read our earlier lesson on How Forex Brokers (Kind<\/a><\/strong><\/p>\n\n\n\n

How Do Forex Brokers Work<\/h1>\n\n\n\n

a) Work<\/a> <\/strong>starring Batman and Spider-Man. It\u2019s highly recommended that you read this lesson first.<\/p>\n<\/blockquote>\n\n\n\n

When you \u201cbuy EUR\/USD<\/strong>\u201c, are euros actually transferred to your trading account?<\/p>\n\n\n\n

Or when you \u201csell GBP\/USD<\/strong>\u201c, how is this possible if you don\u2019t have any British pounds in your possession?<\/p>\n\n\n\n

You might think you\u2019re buying and selling actual currencies, but you\u2019re not.<\/p>\n\n\n\n

You are not buying or selling anything tangible, you are simply speculating on currency exchange rates<\/strong>.<\/p>\n\n\n\n

Speculation can be described as \u201ctaking a view<\/strong>\u201d of the directional movement<\/strong> of a currency pair\u2019s exchange rate.<\/p>\n\n\n\n

\"Forex<\/figure>\n\n\n\n

As a speculator, you are essentially making bets<\/strong>.<\/p>\n\n\n\n

En exchange rate<\/strong> represents the relative price of two currencies.<\/p>\n\n\n\n

Retail forex trading isn\u2019t about buying or selling currencies, it\u2019s about betting on a change in the exchange rate<\/em> between two currencie<\/strong>s\u2026.whether it will rise or fall.<\/p>\n\n\n\n

For example, the EUR\/USD exchange rate implies the relative<\/em> price of the euro in terms of U.S. dollars.<\/p>\n\n\n\n

If the EUR\/USD exchange rate is 1.1050, it means that you need $1.1050 to buy \u20ac1.<\/p>\n\n\n\n

The exchange rate determines how many units of currency are needed to buy one unit of another currency<\/strong>.<\/p>\n\n\n\n

So if we put this all together, trading forex (or FX) as a retail trader is just betting on the future exchange rate of one currency against another<\/strong>.<\/p>\n\n\n\n

Betting that the euro will get stronger relative to the U.S. dollar means you have \u201cgone long<\/strong>\u201d euro versus the U.S. dollar or \u201cbought EUR\/USD<\/strong>\u201d.<\/p>\n\n\n\n

Betting that the euro will get weaker relative to the U.S. dollar means you have \u201cgone short<\/strong>\u201d euro versus the U.S. dollar or \u201csold EUR\/USD<\/strong>\u201d.<\/p>\n\n\n\n

Now that we understand that we\u2019re just betting on whether exchange rates will go UP or DOWN<\/strong>, where exactly do these exchange rates come from?<\/p>\n\n\n\n

Where Do Exchange Rates Come From?<\/h2>\n\n\n\n

The exchange rates come from the spot FX market<\/strong>, also known as just \u201cspot FX<\/strong>\u201d.<\/p>\n\n\n\n

In the spot FX market, \u201cspot trades<\/strong>\u201d, also known as \u201cspot transactions<\/strong>\u201d occur between institutional traders<\/strong> known as \u201cFX dealers<\/strong>\u201c.<\/p>\n\n\n\n

What is being traded exactly in the spot FX market?<\/p>\n\n\n\n

Contracts. Specifically, foreign exchange (FX) spot contracts.<\/p>\n\n\n\n

FX spot contracts stipulate an actual physical exchange of the underlying<\/em> currencies at a specific exchange rate.<\/strong><\/p>\n\n\n\n

It\u2019s important to point out that you are NOT trading the underlying currencies themselves, but a contract<\/strong> involving the physical exchange<\/strong> of the underlying currencies.<\/p>\n\n\n\n

In the spot FX market, an FX dealer buys or sells a contract to physically <\/em>exchange one currency for another currency.<\/p>\n\n\n\n

This means that a spot trade is a binding obligation to buy or sell a certain amount of foreign currency at an agreed-upon price  (or exchange rate)<\/strong>.<\/p>\n\n\n\n

\"Spot<\/figure>\n\n\n\n

So if you were to buy EUR\/USD on the spot FX market, you are trading a contract that specifies that you will receive a specific amount of euros in exchange for U.S dollars at an agreed-upon price.<\/p>\n\n\n\n

This agreed-upon price is known as the \u201cspot rate<\/strong>\u201d.<\/p>\n\n\n\n

This price is determined at the point of trade<\/strong>, and the physical exchange of the currency pair takes place right at the point of trade or \u201con the spot\u201d. (Although in reality, most transactions usually take 2 days to settle.)<\/p>\n\n\n\n

En spot rate<\/strong> also referred to as the \u201cspot price<\/strong>,\u201d is the current \u201cmarket price\u201d (exchange rate) of a currency pair.<\/p>\n\n\n\n

The tricky thing to be aware of is that there is no single \u201cmarket price\u201d for a currency pair<\/strong>. That\u2019s because the FX market is decentralized.<\/p>\n\n\n\n

Think of the spot FX market like going to a bazaar<\/strong>.<\/p>\n\n\n\n

Let\u2019s say you want to buy a rug and there are 10 different merchants selling this rug.<\/p>\n\n\n\n

You visit each merchant at their booths and ask what their selling price for the rug is. Each will quote you its own \u201cspot price\u201d independent of each other (assuming they don\u2019t overhear your conversation with other merchants).<\/p>\n\n\n\n

\"OTC<\/figure>\n\n\n\n

After you\u2019ve asked around, you\u2019ll pick the rug merchant who gave you the best price. This is su<\/em> \u201cspot price\u201d for the rug.<\/p>\n\n\n\n

FX dealers may quote different spot rates to different market participants. The \u201cspot price\u201d is found by asking a bunch of different FX  dealers at the same time. So the spot rate is really a matter of \u201chow many people you ask\u201d.<\/p>\n\n\n\n

It is from these spot rates that your forex broker (hopefully) uses as a reference<\/strong> when it displays its prices on its trading platform for you to trade on.<\/p>\n\n\n\n

We say \u201chopefully\u201d because as a retail forex trader, it\u2019s important to know that you are NOT trading in the spot FX market.<\/p>\n\n\n\n

A spot trade involves physical settlement<\/strong>, meaning if you bought EUR\/USD, you\u2019d have to fulfill the contract and physically deliver U.S. dollars and accept delivery of euros<\/strong>.<\/p>\n\n\n\n

This would be great if you were like a European manufacturer who exports goods to the U.S. or maybe a wealthy American tourist who is about to go on holiday in Europe for the summer, but we assume you\u2019re neither.<\/p>\n\n\n\n

\n

The concept of spot FX trading is similar to that of futures trading, in which the trader is buying and selling agreements to make or take delivery of an underlying asset at a specified time in the future. But the time frames are much different. Whereas spot FX is delivered within a few days, futures are delivered months later.<\/p>\n<\/blockquote>\n\n\n\n

As retail forex traders, we\u2019re not interested in actually taking possession of actual foreign currencies<\/strong>, all we care about is what happens to the exchange rate of EUR\/USD.<\/p>\n\n\n\n

Remember, we are simply making bets on (and trying to profit from) the movement of exchange rates of currency pairs<\/strong>.<\/p>\n\n\n\n

So the exchange rate (\u201cprice\u201d) you want to make bets on (\u201ctrade\u201d) is assumed<\/em> to be based on the \u201cspot rates\u201d made from \u201cspot trades\u201d in the \u201cspot FX market\u201d, but as a retail forex trader, you are NOT trading in the \u201cspot FX market\u201d yourself.<\/p>\n\n\n\n

If you\u2019re not making spot trades, WHAT exactly are you trading then?<\/p>\n\n\n\n

Numbers on a Screen<\/h2>\n\n\n\n

You are literally making bets on whether numbers on a screen will go up or down<\/strong>.<\/p>\n\n\n\n

Here\u2019s a helpful analogy.<\/p>\n\n\n\n

Let\u2019s pretend there\u2019s a website where you can buy or sell an iPhone.<\/p>\n\n\n\n

\"Marketplace\"<\/figure>\n\n\n\n

On this website, the price of the iPhone constantly changes based on how many people are buying the iPhone versus how many people are selling their iPhone.<\/p>\n\n\n\n

Technically speaking, if the current iPhone price is $1,000, you could write it as:<\/p>\n\n\n\n

iPhone\/USD = 1,000<\/pre>\n\n\n\n
1 iPhone can be exchanged for 1,000 U.S. dollars.<\/p>\n\n\n\n
The same thing if the iPhone was priced in euros. If the current iPhone price is \u20ac900, you could write it a:<\/p>\n\n\n\n
iPhone\/EUR = 900<\/pre>\n\n\n\n
1 iPhone can be exchanged for 900 euros.<\/p>\n\n\n\n
In this example, we\u2019ll assume the iPhone is priced in U.S. dollars.<\/p>\n\n\n\n
You are glued to your computer monitor as you watch the price move up and down.<\/p>\n\n\n\n
You\u2019re a devout Android smartphone user and even have a huge green tattoo of the Android logo on your chest, so while you personally hate iPhones, you think the price of the iPhone will continue to rise due to strong demand from irrational Apple fanboys and want to try and make some money on this prediction.<\/p>\n\n\n\n
Pero you don\u2019t want to deal with having to physically buy an iPhone<\/strong>, and then wait for the price to rise, and then have to physically sell it for a profit.<\/p>\n\n\n\n
You don\u2019t want to own an iPhone. That would mean having to touch one. The mere thought makes you nauseous. \"\ud83e\udd22\"<\/p>\n\n\n\n
You just want to make a bet that the PRICE will go up from here.<\/p>\n\n\n\n
Now imagine there is a totally separate website where all it does is monitor the price changes of the iPhone from the first website.<\/p>\n\n\n\n
\"Bet<\/figure>\n\n\n\n
Think of this website like a \u201cscoreboard\u201d that simply displays what\u2019s going on the other website and updates in real-time.<\/p>\n\n\n\n
But it doesn\u2019t just display the current iPhone price, it also allows you to make bets on whether the price shown will go up or down<\/strong>.<\/p>\n\n\n\n
Here\u2019s how the bet works:<\/p>\n\n\n\n
    \n
  • You and the website agree to pay each other the change in the iPhone\u2019s price.<\/li>\n\n\n\n
  • Depending on which way the price moves, one party pays the other the difference between the time the bet was made to when the bet was closed.<\/li>\n\n\n\n
  • If the difference is\u00a0positive<\/strong>, you win the bet and the website pays\u00a0you<\/em>.<\/li>\n\n\n\n
  • If the difference is\u00a0negative<\/strong>, you lose the bet and you pay the\u00a0website<\/em>.<\/li>\n<\/ul>\n\n\n\n
    For example, you see that the current price is $900<\/strong>. You think the price will go UP from here so you place a bet.<\/p>\n\n\n\n
    In order for the website to accept your bet, it asks you for a \u201csecurity deposit\u201d of $100. This deposit is needed just in case you\u2019re wrong and the price starts falling.<\/p>\n\n\n\n
    People who lose bets tend to \u201cghost\u201d you and disappear rather than paying up. The website wants to protect itself from this risk of dealing with deadbeats.<\/p>\n\n\n\n
    If the iPhone\u2019s price falls to $800, your bet will automatically be closed and the website will keep the $100 to cover your loss. But if you win, you\u2019ll get the deposit back.<\/p>\n\n\n\n
    Fortunately, the price proceeds to rise to $1100<\/strong> and you decide to close your bet.<\/p>\n\n\n\n
    The website pays you $200<\/strong>, the difference between the price when you opened the bet ($900) and when you closed the bet ($1100). Your security deposit is also returned.<\/p>\n\n\n\n
    As you can see, when you make a bet on this second website, you\u2019re not actually participating on the first website<\/strong> where the actual buying and selling of the physical iPhones is happening.<\/p>\n\n\n\n
    You are simply speculating on the price direction. Like a betting game.<\/p>\n\n\n\n
    You never actually bought or sold an actual iPhone.<\/strong><\/p>\n\n\n\n
    Now substitute the scoreboard showing prices of \u201ciPhone\/USD\u201d with \u201cEUR\/USD\u201d and you now have a good idea of how retail forex trading works!<\/p>\n\n\n\n
    You are trading a \u201cscoreboard\u201d of FX rates that your forex broker displays to you on its trading platform.<\/p>\n\n\n\n
    \"FX<\/figure>\n\n\n\n
    For example, if you think EUR\/USD will go up, you click \u201cBuy\u201d.<\/p>\n\n\n\n
    When you \u201cbuy\u201d, you are placing a bet with your forex broker that the PRICE will go up from the current price.<\/p>\n\n\n\n
    You don\u2019t actually own or take possession of currencies. It\u2019s not like trading stocks, where when you buy Apple, you actually own Apple shares.<\/p>\n\n\n\n
    When you \u201cbuy\u201d or \u201csell\u201d EUR\/USD, you\u2019re not actually buying physical euros or selling physical dollars.<\/p>\n\n\n\n
    What you\u2019re actually doing is making a directional bet on the exchange rate (or price)<\/strong> itself.<\/p>\n\n\n\n
    This is done through the use of a financial instrument known as a financial derivative contract (\u201cderivative\u201d)<\/strong>.<\/p>\n\n\n\n
    A derivative<\/strong> is a financial instrument that enables traders to speculate on the price movement<\/strong> (\u201cchange in price\u201d) of assets without purchasing the assets themselves.<\/p>\n\n\n\n
    The value of a derivative is dependent upon or DERIVED<\/em> from the value of its underlying asset, which can include bonds, stocks, commodities, crypto, or currencies. In this specific example, the underlying asset is EUR\/USD.<\/p>\n\n\n\n
    Because there is nothing physically being traded when derivative positions are opened, they exist as a contract<\/strong> between two parties.<\/p>\n\n\n\n
    So when you \u201cbuy\u201d EUR\/USD, your forex broker \u201ccreates\u201d (or \u201cissues\u201d) a derivatives contract between itself and you.<\/p>\n\n\n\n
    This contract is known as a contract for differences (CFD).<\/strong><\/p>","protected":false},"excerpt":{"rendered":"
    As a retail forex trader, what are you actually trading? New forex traders might be puzzled about how it\u2019s possible to trade currencies they don\u2019t physically own. They\u2019re also often confused about how it\u2019s possible to sell something before buying it. Let\u2019s revisit a part of the earlier story about Batman and Spider-Man: Oh really? Let\u2019s make a bet […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49,48],"tags":[],"class_list":["post-3532","post","type-post","status-publish","format-standard","hentry","category-forex-brokers-101","category-kindergarten"],"_links":{"self":[{"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/posts\/3532","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/comments?post=3532"}],"version-history":[{"count":1,"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/posts\/3532\/revisions"}],"predecessor-version":[{"id":3533,"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/posts\/3532\/revisions\/3533"}],"wp:attachment":[{"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/media?parent=3532"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/categories?post=3532"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/apex-aiexperts.com\/es\/wp-json\/wp\/v2\/tags?post=3532"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}