I will answer your question from the assumption that you are referring to “spot” forex trading from a “margin” account (although the answers could be applicable to trading futures or other forex instruments even with no leverage or 100% margin), whether exchange-traded or off-exchange:
- Trade example: If you buy 1000 units of EUR/USD and the ask price is 1.3001, that
means the USD value of the 1000 euros you bought are roughly
$1300.10. In a margin account that allows you to trade but never
delivers the actual currency (i.e. trades are always cash-settled)
this means that you will be deducted the margin requirement to
establish the trade, at 10:1 leverage for example, 10% of the USD
trade value would be required as margin or $130.01, which can be
thought of as collateral that you might get back when the trade is
closed. (I said "might-get-back" as there could be an adverse market move that causes a negative balance if the market gapped sufficiently and
depending on the broker’s execution policy) (more on margin accounts here: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_marginaccount and here: https://www.cftc.gov/IndustryOversight/Intermediaries/FCMs/fcmsegregationfunds.html).
In the above example, once
you open the trade, the profit or loss will be determined based on
whether the market price goes above or below your purchase price,
where each pip or 0.0001 change in the EUR/USD rate will equal
roughly 10 US cents in profit or loss.
- If you then proceed to sell you will simply either realize a profit if you sold at a higher rate that the purchase price, or a loss if you sold at a lower rate, or break-even if you sold at a similar rate – less the spread plus any commission (in order to cover the transaction cost). For example, if you bought at 1.3001 and sold at 1.3011, you would have a profit of 10 pips or roughly $1 USD, which would be added to your balance. If you sold however in the same scenario at 1.2991, you would have a loss of $1 USD deducted from your available cash balance. To break even you would need to be able to sell at the same price you purchased, so the bid would need to be 1.3001 to exit the trade flat with neither a gain nor loss.
- Yes, eventually you would have to sell an equivalent amount to close the trade (or partial amount to partially-close the trade), otherwise there could be margin-call if the trade moved against you sufficiently and there wasn’t enough of a balance left in the account to cover losses, unless you had a stop-losses order in place which could help close the trade at a price that would be a pre-determined loss. There are also cost-of-carry charges that are applied depending on whether you are buying or selling, and while these could earn you positive credits in some cases, many major currencies such as the euro could charge debits on the cost-of-carry (known as carry trade, premiums, or overnight charges) whether you are buying or selling.
- When using a broker for foreign exchange (Forex), it’s important to ask whether they can deliver the counter currency to you physically, or if all trades are just cash settled (i.e. would you be able to Withdraw CAD to your bank account or how could the broker otherwise deliver the CAD currency to you?) If the broker doesn’t offer physical delivery, then it means the service is only for speculators or hedgers, and not for actual use of the currency in the tangible sense (such as needing it for travel or to make a foreign purchase of property).
- What you read sounds like it was referring to the non-deliverable “contracts” in the over-the-counter market, like the ones I mentioned where they are cash-settled and no delivery is taking place. However, the brokers and dealers are usually trading the actual underlying currency in the background in order to manage their inventory and risk in some cases, as a market-maker or agency, depending on their business model. In those cases, real forex trades in the actual spot market settle on a 2-day basis, and is usually handled by the broker’s banks or prime-broker on their behalf, and will involve the use of foreign currencies being transferred or other ways to reconcile what is owed before the 2-day settlement period is over. Retail trades don’t usually deal with that type of a setup, but it has been offered before, and is usually the case with exchange-traded products such as certain futures contracts in which you can take delivery of the underlying.
(Disclosure: I am affiliated with ForexBrokers.com, and also hold a series III license with the NFA and registered with the CFTC as a CTA, publishing-only)