Account Base Currency

Hi,

Please can someone explain what the impacts are of your account currency on which pairs you trade?

For example if I’m in the UK and wanted to trade EUR/USD, what charges would I face having a GBP account? Would I have to pay & convert GBP to the pair base currency on every trade entry/exit?

Thanks :slight_smile:

In the retail forex market, regardless of the pair you choose to trade, there will be no conversion of your account currency into any other currency, at any time. Therefore, there is no special fee for you to pay in order to trade a pair in which the base currency does not match your account currency.

And, let’s get a couple more things out of the way, while we’re on the subject.

• There is no buying or selling of currencies in the retail forex market. Your retail forex broker does not maintain an inventory of foreign currencies, and does not operate like one of those currency-exchange kiosks at airports.

• And when you use leverage, your retail forex broker does not lend you money to finance your leveraged positions.

So, now that you know some of the things that don’t occur in this market, let’s run through what does happen when you place the trade you described in your post.

You have an account denominated in GBP, and you want to trade EUR/USD. The position you take is essentially a bet on the future price of the EUR in terms of the USD. Let’s say you choose to go LONG. We typically use the term BUY to represent taking a LONG position. But, as mentioned above, there is no actual buying (or selling) in this market. Your LONG position is a bet that the price of EUR/USD will rise from your entry level, and you expect your bet to pay off in GBP. Let’s say your bet is successful, and you earn a profit.

The rise in the EUR/USD price occurs in U.S. dollars, because that’s what the EUR/USD price means. If EUR/USD = 1.0900, it means that €1 = $1.09. If the price rises to, say, 1.1000, the price of one euro has increased by $0.01. That 1¢ increase per unit of EUR/USD traded times the size of your position indicates the profit on your trade — in U.S. dollars. But, you want your profit applied to your account in pounds sterling. So, a calculation has to be made to convert your USD-profit into a GBP-profit. That conversion is not a physical currency exchange. It’s simply an accounting process.

If the 100-pip profit you earned in that EUR/USD trade earned you a profit of $100 (for example), and the GBP/USD exchange rate when your trade closed was GBP/USD = 1.2165, then your $100 profit was equal to £82.20 (that is, $100 / 1.2165 = £82.20 rounded off). That conversion from a USD-profit to a GBP-profit was done automatically, when your trade closed, and your profit in GBP appeared instantly in your account P/L.

At no time did you (or your broker) handle any EUR or USD in connection with this trade. The EUR/USD pair was simply the instrument you were betting on (or speculating on, if you don’t like the concept of betting).

Here’s a way to think about it — When you go to the racetrack and bet on a horse to win, you don’t BUY the horse with your GBP. And when you go into the retail forex market and bet on the EUR/USD, you don’t BUY the EUR with your GBP, although we use the term BUY (meaning to go LONG), because we have inherited the BUY/SELL terminology from other markets in which actual buying and selling does take place (equities and commodities, for example).

Sorry for the long-winded reply. I hope it was helpful.

2 Likes

It is simple, there is no impact at all, and you won’t be charged conversion fee by your broker.

If you are actually in the UK, do not ignore the availability of spreadbetting accounts for forex trading.

UK SB firms are as heavily regulated as other types of broker here, they offer accounts for low deposits with position sizes less than £1 per pip. All profits are tax-free and not even declarable to HMRC.

Thanks all, that’s really helpful :slight_smile: