If I am understanding things correctly, trading a pair that doesn’t include my account’s currency means I am taking BOTH 1) the risk of my actual trade and 2) the risk of the exchange rate of my account’s currency and one of the currencies in the pair.
Example:
I have a CAD account and I bought a mini lot of EUR/USD at an ask price of 1.09 and sold it 100 pips later at 1.1.
Scenario 1 (See screenshot below):
The EUR/CAD rate at entry was 1.55, and when exited it, it went UP 100 pips to 1.56. So I just made CAD $141.82.
Scenario 2 (See screenshot below):
The EUR/CAD rate at entry was 1.55, and when exited it, it went DOWN 100 pips to 1.54. So instead I made CAD $140
Questions
When going long at a pair that doesn’t involve my account’s currency, do I look at the bid or ask price of the conversion’s exchange rate? In my example above, do I look at the bid EUR/CAD or the ask EUR/CAD?
Follow up question to 1., I assume when I am exiting the trade or if I am going short, everything would just be the opposite, correct?
If the conversion rate changes by a lot more than I think that could change my P/L by a significant amount, how do you factor in the conversion currency risk before entering the trade?
Not familiar with Questrade but my platform takes care of all that in real time. I can just hover my mouse and it tells me what my profit/loss is in my account currency–it updates when I move SL and TP. I also have algorithms that calculate all that for me (in different currencies if I want) using ready made stuff. Ninjatrader, Interactive Brokers API, MT4, MT5, cTrade do all that.
I need to concentrate on my process not spend time calculating. Sorry mate, can’t help you. I wish I could but I’m not familiar with Questrade. Sorry to waste your time. Well maybe I can answer some questions.
Question 1 and 2: If you are long and you want close your position, you look at bid. If you are short and you want to close you look at ask. Reverse that if you want to open a position (e.g. to go long you look at Ask). Bid/Ask changes quite fast though which is why a good platform is a good to have.
My question is how to measure P/L given stop-loss or take-profit levels before entering the trade with a currency pair that’s not in my account’s currency.
When you have a private retail forex trading account, the profit and loss will be in the account’s currency, in this case CAD.
The only time you need to worry about conversion is when you wish to deposit money into the account from another currency or you wish to withdraw money from the account and spend it as another currency.
No currency conversion costs arise during the life of a trade.
If I have a CAD account and I want to go long on EUR/USD, my broker would have to first convert my CAD to USD. When I want to close my position (sell the EUR to buy the USD), my broker would then again have to convert the USD to CAD.
It’s the USD/CAD conversion rate I am asking about.
This is not correct. When you go long EUR/USD, using your CAD account, no currency changes hands. The broker does not physically buy EUR, and he does not physically sell USD. Neither you nor the broker has bought (nor sold) anything.
The legal contract you have with the broker regarding this position is effectively a bet. You are betting the EUR/USD exchange rate will rise.
If the exchange rate rises the broker pays you CAD in proportion to the size of your bet. It does not matter where the CAD exchange rates with EUR and USD have gone in the meantime.
I am sorry if the idea that you are betting might cause some issues.
It’s not your problem mate Just wierd that some people seem to think what we do is somehow more wholesome than “proper gambling” !
@tommor is quite right - you’re just betting on a dot moving up and down on your screen - the movement is measured in “Pips” - you bet x-amount per pip and the result is calculated by the amount “x” multiplied by the no of “Pips” it has moved - that’s all there is to it !
Why does every PIP value calculator online, including the one from babypips, takes into account the conversion rate when the account’s currency is not in the pair?
I guess this is just to help out the people who have a trading account in a foreign country from where they live. If this applies to you then of course you are going to have to pay the current exchange rate to turn your CAD into your home country’s currency. But nobody gets the profits from every trade sent to them after each trade so I suppose its just for illustration so clients understand how much they’re risking / making / losing. If you try to work each trade on this basis, trading is going to be very difficult and very complicated.
Oh really? Imagine the following situation: my account currency is USD and I’m going to go long AUDJPY.
Without going into nuances of CFD trading my broker should “lend” me JPY according to JPYUSD rate, so I can then exchange JPY to AUD. Let’s imagine AUDJPY rose 1%, but JPYUSD fell 3%.
Closing AUDJPY trade I will exchange back AUD to JPY (1% gain) and then return JPY to the broker which will convert them to USD with 3% loss. Net result is -2%, not counting commissions and spreads here.
Just wierd that some people seem to think what we do is somehow more wholesome than “proper gambling” !