Understanding cross pairs in general
To let you understand faster, we are using less decimals. The spread i.e. bid/ask price in this article is purely fictional.
Looking at the Market Watch, we would notice that all the forex symbols come in pairs.
Take EurUsd for instance, the first part denotes the base product of which you actually trade i.e. Euro, where the latter denotes the quote currency of bid and ask price.
When EurUsd is showing bid/ask price 1.21/1.22, it would essentially means:-
- the market is bidding each Euro at 1.21 US Dollars;
- the market is asking each Euro at 1.22 US Dollars.
In another words:-
- you will be able to sell each Euro you own at 1.21 US Dollars in return;
- you will be able to buy each Euro you want at the cost of 1.21 US Dollars;
The first currency is the product you are actually trading, where as the latter is the currency of the price of the product denotes in.
If you are buying 1.00 lot EurUsd at 1.22, then you are said to be spending 122,000 US Dollars to buy 100,000 Euro.
After 2 hours, when the bid/ask price of EurUsd is now 1.23/1.24, you have decided to close the buy position by realizing (selling back) 1.00 lot EurUsd at 1.23, you will get 123,000 US Dollars for selling all 100,000 Euro you have bought earlier, yielding a gross profit of 1,000 US Dollars.
In most of the cases, you will likely be having a trade account with US Dollars denoted as its base currency i.e. your balance in your trading account is denoted in US Dollars. In that case, no further conversion will be needed as the profit currency is also in US Dollars.
On the next day, you have decided to buy 1.00 lot UsdJpy at 103.00/104.00. Essentially, you are buying 100,000 US Dollars with 10,400,000 Japanese Yen.
One hour later, you have decided to realize the buy position (by selling) 1.00 lot UsdJpy at 105.00/106.00. Hence, you are selling back the 100,000 US Dollars and get back 10,500,000 Japanese Yen, yielding a gross profit of 100,000 Japanese Yen.
As your trade account is denoted in US Dollars, the profit realized will need be converted back to US Dollars. This is usually automatically completed by the trade system, by selling 100,000 Japanese Yen at 105.00 Japanese Yen per US Dollar, hence converted profit of 952.38 US Dollars will appear as the balance in your US Dollars denoted trading account.
That’s how cross pair works!
As a conclusion: if you are trading a symbol where its quote currency (aka profit currency) is not the same as your trading account base currency, then conversion of profit from quote currency to your trading account base currency will be completed automatically.
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