How do 'successful' Forex Traders deal with their home countires currency fluctuation

Beginner Questions
1

Hi All,
This is my first post, I am new to this forum, and forex trading but have a question that has been bugging me for quite some time, and it comes from a recent trade I did in a stock in the US, as I am in Australia.

I bought the stock, it appreciated 20%, yet when I sold it, and it was converted back to AUD, it was a loss! The AUD had appreciated so much in that time.

This got me to looking deeper into this and I realize that this is not something a successful forex trader can ignore. Well maybe a very short term trader…maybe…but someone who trades off longer term charts, i.e. hourlies to weeklies, must surely have to consider this.

I have a few examples of movements on the EUR/USD to demonstrate my point

If you had gone short the EUR/USD on the 12th April 2010, and then convered on the 7th June 2010, you would have netted about 1810 pips, and lets say for argument sakes you were trading $1 lots and you traded just that one lot, thats a profit of $1810 USD. But when converting back to AUD, it would have resulted in a AUD loss.

12th Apr 2010
EUR/USD rate 1.3690
AUD/USD rate .9387
therefore your one mini lot as Euros in AUD = 1.4584 (1.3690/.9387)

7th Jun 2010
EUR/USD rate 1.1875
AUD/USD rate .8095
therefore your one mini lot as Euros in AUD = 1.4670 (1.1875/.8095)

Doing the math here, this would have resulted in a 86 pip loss in AUD!!!

Another example

7th June 2010

Long EUR/USD @ 1.1875
AUD/USD rate - .8095
one mini lot as Euro in AUD 1.4670 (1.1875/.8095)

Close position

4th Nov 2010

EUR/USD rate 1.4280
AUD/USD rate - 1.0175
one mini lot as Euro in AUD 1.4034 (1.4280/1.0175)

What was a 2405 pip gain in EUR/USD ended up being a 636 pip loss in AUD!!!

Just for clarity here because some people only look at pips and not $. Using the last trade again in $ this time

I buy one hundred Euro at 1.1875 it cost me $146.70 AUD
Then I sell those euros at 1.428 and receive $140.34 AUD

A loss of $6.36!

Basically I have looked at a lot of my trades from backtesting and there is no escaping this currencey fluctuations, UNLESS it seems, you are lucky enough to have your home currency stay perfectly still or better yet, move in the opposite direction to the traded one.

So my question to those that have succeeded at trading forex, and trade outside of the US or, or those that live in the US that trade other currency pairs such as EUR/JPY and other crosses (that do not have the USD) is

How do you counter this?

Thanks

2

You don’t have to.

Technically, your trade never leaves it’s base currency.

Yes, you “buy” one currency, or “sell” another, but you never own it, and it never gets converted. You only have rights to the difference between the two that occurs after you enter a trade. There may be a SLIGHT change in the gains from date of enter, to date of close, but it will actually fluctuate during a long term trade, and you wouldn’t notice it.

The $100 you may pocket after a winner may be worth 20% less, but it’s still $100 in your base currency.

Getting in on a long term trade with a nasty swap rate is a MUCH bigger concern;)

3

Hi Master Tang,
Thanks for the reply, but I am still confused.

Are you saying that at the point of going long say EUR/USD that no conversion takes place until I close this position out? If this is the case, how is it that if my account balance is in AUD the broker is able to tell me how much margin I am using in my position if no conversion takes place?

Aslo, when you say long term, is June to November trade not long term?

Cheers

4

There is no conversion EVER.

Forex is based on a transaction that will happen in the future, except they re-up the contracts so that day of reckoning never arrives.

Your margin is based off of the exchange rate, yes. But there is never an exchange, and your gain or loss is exhibited in your base currency.
Your margin is calculated off of the current conversion rates from your base currency, to the currency you are buying a contract of.

If you use the Aussie to buy a standard $100,000 unit of euro, $100,000 euro would be roughly $135,000 Aussie.

So at 100:1 leverage, you would use $1,350.00 of your aussie dollars margin.

And June to November is a long time… In forex anyway.
Look at this last year. If you had bought an E/U contract in June, and sold in November, you could have possibly gained 1800 pips. That was from the very bottom, to the very top. (not a likely trade, unless you’re in a perfect world)
Factor in the swap rate, which will cost you roughly half a pip of gain a day.

So you lost 90 to 100 pips just to leave the trade open that long. And the buy on the E/U is very cheap at the moment.

If you were selling an A/U contract short, it’s about 2 pips a day to leave open. That cuts into your profit quickly on long term trades.

That one would cost you around 300 pips out of your profit.

So unless the swap is in your favor, it doesn’t really pay to have those longer term trades.

I’d rather day trade, pay minimal swap, and gain 1,000+ pips a month.

5

Of course you Aussies, and your 400:1 leverage will only tie up $337.00 for a 100k unit.

While that is a tantalizing advantage, it can be very costly. Don’t fall for it;)

6

@Celestial34

If you have your account in AUD and you go for example long on EUR/USD you are betting that the Euro will strengthen against the US dollar a certain amount of pips. Each pip has a specific value in your account currency - let’s say 1 pip is one Aussie dollar. Now if the EUR/USD goes up 10 pips and you close the trade you earn 10 AUD, if EUR/USD goes down 10 pips you loose 10 AUD. As you can see AUD in your account is not converted into another currency, what is happening is that you are betting on how the relationship between EUR/USD will change.

With your US stock problem, I am guessing that firstly you converted AUD into USD, you bought your stocks with USD, you made the profit and you sold the stocks and you converted USD from the stocks back into AUD.
Here you actually did convert currencies and during your stock trading AUD had strengthened against USD.

Cheers
P.

7

Ok, thanks. I understand now. And thanks for the info on the swap rate, it is something I didn’t know about and will have to certainly factor in.

I can’t day trade so that’s not an option for me, but thanks for sharing

8

Thanks Paul, and here basically lied the fundamental issue and my misunderstanding of it. Because it happened in a stock trade I assumed it would happen in all markets. Now I know this is not the case

Edit: I didn’t actually do the conversion my broker did, and this was also why I assumed it was a natural occurrence in all markets

Thanks

9

I spend very little time these days, and always get a full night’s sleep. And I day trade.

I set everything up with pending orders, nightly before the London open, and it either happens, or it doesn’t.

I did spend a lot of time getting to this point, but it was worth every second.

You don’t have to be married to your computer to do this successfully:)

10

Oh, one other question…how do you work out this swap rate and it’s cost as per pip? What would the cost be if I were LONG the AUD/USD instead of short?

cheers

11

Then you would make money. About a pip a day’s worth.

But would you buy a lot at the all time high?

You would have to hold it a long long time to break even if it crashed;)

12

Oh ok, so it has something to do with interest rate differentials? Is there a way to work it out for back testing purposes?

I’m not sure I understand what you mean by ‘But would you buy a lot at the all time high?’, my question was only a hypothetical

My system I have backtested ranges from a few days to a few weeks per trade, with only around 2-3% of trades going longer than say a month. Does this make more sense in light of my questions?

Cheers

13

Yep it IS based on interest rate differentials.

Here’s the current swap rates from IBFX. I checked, and they are the same for your Aussie account.

Swap Rates, Interest Rate swaps, FX Rates - Forex Trading Tools - Interbank FX

I don’t know about the backtesting addition of the swap though.

If you know the percentages, you could probably just figure an average of trade time, and add or subtract the swap as needed. And I know how much I’m paying a day per pip based on trades I have made. They do have a mathmatical formula that shows you how to figure swap rates for all the pairs on that site.

16

Okay… What exactly are you saying, that is different than what I posted?

Your account is in Russian rubles.

Your broker handles the “conversion”, but there really IS no conversion. The difference in currency values is accounted for by the margin needed in your base currency.

Every transaction you enter is shown to you in the value of your rubles, with the ony variable being the margin needed to open a trade. Because the value of your base currency flutuates trade to trade.

Your lot margin used, your account balance, and your gain, or loss, per pip is all shown to you in your base currency.

And it’s all handled nicely by your trading platform, with no real thought required;)

21

My accounts are in US dollars.

Everything I see, and every pair I trade are based off of that.

When I trade EU/GBP, the margins are much larger, and the per pip gains are bigger.

Why? The dollar is on the weak side of both of those.

My margins are bigger, because of the amount of US it takes to secure those positions.

BUT, I never own a pound, OR a euro in the transaction, nothing is ever really converted, and everything I see ONLY relates to the value based on the dollars in my account.

If you were to trade the same pair, your margins, and everything related to the trade show up in ruble value. You never own a euro, or a pound… Just the difference in the value between them as your trade matures.

You keep posting pics of you account, and the trade sizes.

You’ve never had one ruble actually converted. But if you go back over your history, you will see your margins change from trade to trade, and even from open of trade, to close of trade.

That is your profit or loss, and it’s still in rubles.

23

Account denomination.

Yes.

But the OP was wondering about conversions.

There never really is a conversion from your account denomination. Everything is handled off of the value of your margins, AGAINST your account denomination.

I think we’re on the same page.

Cheers!

25

If it’s “virtual”, it never really happened.

The trades are handled based on the current [B]conversion rate[/B] from your account’s denomination in value only.

You don’t ever swap out currency.

Where’s the beer?

26

I am very clear now. YES there is a conversion but only of the profit/loss from the BASE currency to my ACCOUNT currency and my current broker here in Australia does the conversion at the END of the trade.

Thanks again for sharing and I applaud you for attaining this status but as you say here

I am not at this point and know of no system that would enalbe me to do this…not yet anyway…all I have is what I have

Cheers!

30

What part of that doesn’t make sense to you?

The value of the pip in the euro account is [I][U]still $10 U S dollars[/U][/I].

The “conversion” is only because of the exchange value based on the account’s denomination. But there never really is a conversion, and this all came about because the OP was concerned about losing money due to having a trade open, and her account denomination causing problems.

Ain’t gonna happen:D

And those drinks look good!

Cheers!

32

For crying out loud!!! Are you people here to help or to just rub newbies nose in it???

If you read my OP you’ll read of my ‘stock’ trade, it’s not rocket science and as a newbie I assumed forex trading was the same.

What you have highlighted in BLUE cubanpip is simply indirectly answering my original OP without explanation and if you were my first response I wouldn’t have got it. Because I now KNOW (which I am saying for the 2nd time now), that there is no conversion from my ACCOUNT currency to the base currency on both the open and close of the position, AS IT IS IF I TRADE STOCKS OVERSEAS, CFD’S OVERSEAS ETC.

I read the other post that was of the same question and it’s pretty obvious that you guys get pissed off with newbies but surely you guys started somewhere too…did you not?

With the broker I use when I place stock and CFD trades in a country other than Australia, the original purchase is converted into Aussie dollars and then the profit/loss whatever that may be is also converted into Aussie dollars…here see…this is my example stock (CFD) trade. In US dollars it was a profit, but in Aussie it was a loss. Here look below it is here…

Instrument B/S ISIN Code Order Type Venue Order ID Trade Date Value Date Amount Price Conversion Rate Traded Value Exchange Fee Stamp Duty/Tax Commission Total Fees Booked Amount

PowerShares DB Commodity Index Tracking Fund Bought US73935S1050 Limit Exchange 167588764 06-Mar-2009 2:30 PM 11-Mar-2009 50 19.00 1.568916 950.00 0.00 0.00 -15.00 USD -25.88 -1,516.35
PowerShares DB Commodity Index Tracking Fund Sold US73935S1050 Market Exchange 178397218 07-May-2009 1:45 PM 12-May-2009 50 21.65 1.319741 1,082.50 0.00 0.00 -15.00 USD -21.78 1,406.84

can you now see why I would assume that the same would happen in forex.

But now I know it does not

Thanks