Account base advantage

Beginner Questions
1

Hi there.

I want to know, if there is any advantages of using a stronger currency as account base compared to weaker one.

For example, if I’m using GBP compared to USD, as in my country, GBP will be around x5.5 of my local rate, USD will be x4.5 .

I mean, will I obtain more revenue if I’m using GBP as account base compared to USD if I make consistent profit through trading ?

2

Hello,

The short answer is: No, you can’t increase your profits by denominating your account in a higher-value currency.

The long answer requires an example.

You haven’t specified your country or your country’s currency. I’m guessing that it’s Malaysian ringgit. But, since I don’t know for sure, I will just call it XXX.

Let’s say:

  • You open three accounts: one denominated in XXX, one denominated in GBP, and one denominated in USD.

  • You fund each account with enough XXX, GBP, or USD (as the case may be) to allow you to trade one micro-lot of any pair.

  • You place identical one-micro-lot EUR/JPY trades (each trade entered at EUR/JPY = 132.72) in these three accounts.

Let’s say that current exchange rates are:

  • GBP/USD = 1.3072 (actual rate, as of the time of this post)

  • GBP/XXX = 5.5000 (hypothetical rate as stated in your post)

  • USD/XXX = 4.2075 (implied rate compatible with actual GBP/USD rate, and hypothetical GBP/XXX rate, above)

  • EUR/JPY = 132.72 (actual rate)

  • GBP/JPY = 149.44 (actual rate)

  • USD/JPY = 114.32 (actual rate)

  • XXX/JPY = 27.171 (implied rate compatible with actual GBP/JPY rate, and hypothetical GBP/XXX rate, above)

Note that the hypothetical rate and the implied rates shown above are compatible with the actual rates shown. You can check this for yourself.

For example, GBP/XXX ÷ USD/XXX = 5.5000 ÷ 4.2075 = 1.3072 = GBP/USD. And you can calculate that GBP/JPY ÷ USD/JPY = GBP/USD. And so forth.

Back to your three accounts:

Let’s say you go LONG EUR/JPY at 132.72, and EUR/JPY goes up 100 pips to 133.72. You have just earned 100 pips in each of your three accounts. This profit (100 pips) is worth 1,000 JPY in each of your three accounts. But, your accounts are not denominated in JPY, so your 1,000 JPY profit gets converted to your three account currencies.

  • In account #1 (denominated in XXX), your profit (after conversion) is 36.8039 XXX (based on XXX/JPY = 27.171 above).

  • In account #2 (denominated in GBP), your profit (after conversion) is 6.6916 GBP (based on GBP/JPY = 149.44 above).

  • In account #3 (denominated in USD), your profit (after conversion) is 8.7474 USD (based on USD/JPY = 114.32 above).

Based on the exchange rates given above for GBP/XXX and USD/XXX, prove to yourself that these three profit amounts have the same value.

That is, 36.8039 XXX = 6.6916 GBP = 8.7474 USD (allowing for small rounding errors).

So, you have earned 36.8039 XXX in each account. But, in two of your accounts, that profit is in the form of a foreign currency (either GBP or USD).

The choice of an account currency is a matter of (1) availability from your broker, and (2) convenience to you – but, NOT maximizing profits on trades.

If your day-to-day life (meaning your salary, your expenses, etc.) is denominated in XXX, and if your broker offers accounts denominated in XXX, then it makes sense to denominate your account in XXX.

If your broker offers accounts denominated in EUR, GBP, and USD (but not in XXX), then choose between EUR, GBP and USD based on what’s most convenient for you. The choice will not affect the value (in XXX) of your gains and losses.

3 Likes
3

Thanks, really appreciated!
Very clear.

4

I’d add to this that a good choice of (non-native) currency is one that correlates highly to your native currency. It sucks to see your hard earned gains minimized because your account currency has dropped in value relative to your native currency. If the two currencies tend to move in tandem, then this is less of an issue.

2 Likes
5

Hi @khabib-fans

Since @Clint and @Drekieyja already hit the main points for you, we will only add that if your home currency is not available as an option to open your trading account, then you might still be able to hedge the exchange rate risk between your home currency and the currency in which your trading account is denominated.

For example, suppose you live in Turkey and your money is held in Turkish lira. If you decide to open a US dollar-denominated trading account with 10,000 USD, then you can hedge your exposure to the US dollar/Turkish lira exchange rate by holding a long term short position of 10K USD/TRY in your account.

If the US dollar falls in value, then the money you make on your short position will offset the less favorable exchange rate when you convert your funds back into Turkish lira. If the US dollar rises in value, then you will lose money on your short position, but this loss will be offset by the more favorable exchange rate at which you can convert your US dollars back into Turkish lira.

1 Like