I am currently studying economics in college and taking course Macroeconomics and International Finance which covers foreign exchange market topic. The class is very crowded since there are more than 500 students taking this course and I find myself as the youngest in the class so psychologically it's not easy for me to ask a question when I don't understand certain topics. Here are my complete questions regarding this topic:

  1. How does 'taking sell position' in foreign exchange trading work? How come a trader takes sell position despite not owning currency pairs?

  2. How come when a trader takes sell position his transaction is immediately executed without waiting? Does it mean when he takes that position there is another trader who takes buy position at the same price?

  3. Is it possible there is imbalance transaction between buy and sell position? I mean there are more traders who taking sell position (in term of volume transaction/ lots) than those who taking buy position or vice versa?

  4. Is one person’s profit meaning another person’s loss?

Those questions are not my homework but they arise due to lack of my understanding in this topic and my fear of asking those questions in my class. I apologize in advance for asking too many questions. Any help would be greatly appreciated. Thanks.


1 Answer 1

  1. "Short selling" is a method of trading that includes selling a security (in this case currency) that the trader doesn't own, by borrowing it from a broker.

  2. Prices on forex trading websites are quoted at the current market price, meaning that people around the world are buying and selling at that price at that time. Brokers buy for slightly under market price and sell for slightly over, and they are the ones who actually trade with the average currency trader.

  3. In the scenario where there are more sellers than buyers at a current price, all buyers at that price level will make their purchases and then the price will drop so the market includes more buyers. Demand < Supply so price falls.

  4. People trade currencies for many reasons. Forex trading as an investment does not make up the majority of currency exchange. Businesses that are involved in international trade need different currencies to pay for operations in other countries, to import goods from other countries, etc. and visitors to foreign countries have to buy the currency of those countries. Therefore price changes are not primarily affected by investor activity and many people/businesses do not win or lose on purchasing a currency because they do not hold it as an investment but just spend it.

Hope this helps.




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