With the aim of keeping the calculations as simple as possible, is it better to trade a currency pair where the quote currency is the same as the account currency or the base currency is the same as the account currency or does it not matter as long as one of the currencies is the same as the account currency? Does the answer depend on going long or short on the currency pair?
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If the base currency matches your account currency, you can determine the notional value without doing any calculation, at all. But, getting the pip value might require the use of a Pip Value Calculator.
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If the quote currency matches your account currency, you can determine the pip value without doing any calculation, at all. But, getting the notional value will require a simple calculation on your part.
Those two cases are equally easy – or equally difficult – depending on how you normally view a half glass of water.
- If neither the base currency, nor the quote currency, matches your account currency, then a simple calculation (to get the notional value), and a quick look at the Pip Value Calculator (to get the pip value) is all that’s required.
Ignoring a currency pair because one or two simple calculations might be required in order to plan and manage a trade, is a pretty lazy way to approach this market.
Going long or short has nothing to do with any of the above.
Its not about being lazy, its about learning to crawl before I can walk. I understand that when I trade a currency pair, I’m not really buying either of the currencies, but if my understanding is correct then once a deal is closed I will have a profit or loss in the quote currency. So presumably its is simpler to chose a currency pair with the quote currency the same as the account currency as this then avoids an extra conversion from/to the account currency which would affect the profit or loss.
There’s no conversion involved. You enter into a transaction with your broker in the agreed currency for your account.
e.g. If you’re in the UK and the broker is in the UK, you will have deposited GBP into the account. If you now open a long position on the EUR/USD, your GBP funds are not converted into USD and used to buy EUR. Likewise when you close the trade, no conversion takes place. You have to accept that you’re not buying or selling anything, you are actually opening a bet with your broker that the exchange rate between EUR and USD goes up.
Yes, I understand I’m not buying or selling USD or EUR, but I don’t understand why there’s no conversion to GBP. If i’m betting on the EUR/USD pair, am I betting pounds per pip, eg. win £5 per pip increase or lose £5 per pip decrease (for a long position) Or is that over simplifying things?
That’s not over-simplifying it, that’s stating it as it is. Lot of forex traders don’t like to think of trading as betting. They like to imagine we are in the business of buying and selling currency: for reasons of morality or ethics or even religious beliefs I suppose.
There is no act of conversion when a trade opens/closes because no money is being converted, its a purely theoretical bet. The broker is not a dealer in currency as a result of your trade any more than you are. They might as well be offering bets on the exchange rate between oranges and carrots - likewise no fruit or vegetables would be changing hands.
So the only time you use conversion in this scenario is to convert GBP to USD is for calculating position size for risk management purposes (as used in the position size calculator tool) ?
I now nothing about the position size calculator tool. I manually adjust my positions to my selected % of account capital, this is all done in the account currency, irrespective of the target forex market currencies.
Tommor and Pipsqueak_jack are both correct. But, some clarification is needed.
Tom is describing what happens from the moment a trade is opened, until the moment that trade is closed. As he rightly points out, P/L in that trade does not depend on the account currency of the trader who opened that trade.
Jack is concerned with the bookkeeping that happens after the trade is closed. And, as he understands intuitively, the P/L (whether profit or loss) – generated in pips in the quote currency – must be booked in the account currency after conversion from the quote currency.
Let’s imagine a USD/JPY trade that earns exactily 100 pips in a GBP-denominated account.
While this USD/JPY trade is open, the GBP/JPY exchange rate will fluctuate. Therefore, what 100 JPY-pips are worth (in GBP) when the trade is opened will (probably) not be what 100 JPY-pips are worth (in GBP) when the trade is closed.
How much fluctuation are we talking about? That depends on the duration of the trade. For very short-term trades, the fluctuation will be imperceptible. For very long-term trades, the fluctuation could amount to several percent additional profit or loss, when the final conversion to account currency occurs.
Do long-term traders worry about this uncertainty in the final booked P/L? Generally, no. They are much more concerned with capturing positive carry, and avoiding negative carry on their trades. Carry is a function of base currency imputed interest versus quote currency imputed interest – it has nothing to do with a match, or mis-match between the quote currency and the account currency.
Successful forex trading is not based on eliminating all unknowns and all uncertainty from the trades taken. Rather, successful forex trading depends on finding and exploiting an edge – which, in turn, depends on identifying and managing those unknowns and uncertainties. In the example discussed above, the change in the value of GBP/JPY over the duration of the trade is one of those unknowns.
Last point – If your account is denominated in EUR, you will NEVER be able to match your account currency to the quote currency in any pair you trade, because there are NO currency pairs in which the EUR is the quote currency.
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So to answer my original question then, if my account currency is in GBP, and only considering the simplicity of the maths, my first trades should be EUR/GBP. Then as I progress up the learning curve, trade GBP/USD, and finally EUR/USD. This would then cover all cases (in terms of the maths) from simplest to most complex.
Why are you obsessed about the math?
The math goes on seamlessly, behind the scenes, without your input or intervention.
Don’t you know that your trading platform automatically, and continuously, carries out all those calculations that you are so worried about?
As far as your first trades are concerned —
Your first trades should be in the currency pairs that offer you the best set-ups, based on the strategy you are trying to practice and perfect – regardless of whether those pairs have base currencies or quote currencies that match your account currency.
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I don’t have a trading platform yet. I’m still working my way through the education material on here and deciding on which broker to go with before I start demo trading.
i’m obsessed with the maths because I consider the most important thing I need to understand thoroughly is risk management and calculating position size. I assume the trading platform doesn’t help with that?