Does it really can contain multiple spread / transaction cost?
I’m planning to create multiple accounts for non-USD pairs.
Is it something that makes sense at all?
Hi, I do not really understand what do you mean with containing multiple spread/ transaction cost. Normally non-usd pairs cost you more spreads.
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Hello Geri, welcome to this forum.
Regardless of your account currency, when you trade any currency pair, you pay only one spread, and that spread is the same for all accounts.
You may be confused about what happens inside your account, when you take a position. To use an example, if you BUY (go long) GBP/JPY in a USD-denominated account, you may be thinking that your USD has to be converted into JPY in order to buy GBP – and that appears to be two currency exchanges, involving two transaction costs.
However, that’s not what happens. In the example above, you are simply placing a bet that the GBP will appreciate (rise in value) in relation to the JPY, and you are funding your bet with USD.
No, that does not make sense.
There are sometimes good reasons to have more than one account, but trading different pairs in different accounts is not one of those reasons.
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Thanks for getting back!
Yap, that was my intuition, some sources mention that these kinds of trades actually involves two trade under the hood. It is probably applicable when trade actual currencies, not when betting on retail forex.
Sticking to the go long GBP/JPY on a USD account. Still, I think I’m doing two bets at the same time. The educated bet is the one I make for GBP/JPY using analysis (matching my risk figures), and an implied / unsupervised one for JPY/USD. It seems to me, that if JPY depreciates against USD while I’m in the GBP/JPY trade, it can significantly (?) ruin my profit target. Same for losses, if JPY appreciates agains USD while I’m in the trade, it seems that it magnifies the losses for the trade.
Isn’t this a concern for traders out there?
In case I match my profit currency with my account currency (trade XXX/USD only), it simply won’t be a concern at all. I can credit my expected profit and loss USD values every time.
UPDATE: The profit conversion transaction is not leveraged, probably that’s why it is a less significant inaccuracy. I’ll make some calculations neverthless.
The idea was seeded from the education section: _https://www.babypips.com/learn/forex/impress-your-date-with-forex-lingo
The Cross Currency section goes like:
A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades.
For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs frequently carry a higher transaction cost.
It says “the trader has… …initiated two USD trades.”
Two trades immediately sounded like two spread / comission cost to me. What is “erratic price behavior” means? Would be great to have more details on this.
You are correct. However, most traders ignore the slight impacts of those “implied” bets that you refer to. See my answer, below, for what I mean by slight.
A question somewhat similar to yours was asked back in February, and I answered it this way –
Applying the terminology (in the post quoted above) to the GBP/JPY example we’ve been working with in this thread, USD/JPY is the conversion pair.
The short answer to your question is: A 1% change in the price of the conversion pair will produce a change of approximately 1% in the converted value of the trade profit.
In other words, in the GBP/JPY example, if USD/JPY increases by 1% while the GBP/JPY trade is open, then the dollar-value of the GBP/JPY profit will be reduced by approximately 1%. Conversely, a 1% decline in USD/JPY will produce an increase of approximately 1% in the GBP/JPY profit.
For much larger changes in the price of the conversion pair, that approximation does not hold.
For example, a 50% increase in the price of USD/JPY would reduce the GBP/JPY profit by 66.7%.
And a 50% decline in the price of USD/JPY would increase the GBP/JPY profit by 100%.
If you don’t understand the math behind the short answer, write back, and I’ll run through the long answer.
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From what I have seen it’s callled something like cross currency trading and it should be allowed anyway. But are you really doing two bets at a time ? Could you really go with just one and then with another pair, sorry I am still newbie myself.
Thanks again, awesome community!
Math is clear, I came to a pretty similar conclusion.
In a typical trade, the volume for the traded pair is usually way bigger than the volume of the conversion pair (due to leveraged trading), so the effects of the conversion rate are pretty limited.
That is not correct.
Trade size (volume for the traded pair) does not factor into the relationship between percentages that I pointed out in my previous post.
Do the math for some typical trades, and prove this to yourself.
Also, there is no such thing as “volume of the conversion pair”. The conversion pair is not traded, and therefore cannot be referred to as either leveraged, or unleveraged. The conversion pair is simply the price used to convert a profit (or loss) into the account currency.
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I’m just saying that with the traded rate you exchange e.g. 2000 units of currency (open a 2000 GBP position), while with the conversion rate you exchange e.g. 20 units of currency (realize 20 USD profit).
The scale is two magnitude smaller, so it is a minor thing.