Account currency and conversion costs, a small leak I hadn't noticed

[Fairman]

Account currency and conversion costs, a small leak I hadn't noticed

I trade pairs that don't have my account currency in them, and every profit and loss is converted back at some rate. I hadn't thought about the cost of that until I looked closer.

For a pair like EURUSD in an account denominated in something else, the profit is calculated in the quote currency and then converted. Most brokers do this at their own rate, and that rate may include a margin. On small trades it's insignificant, but across many trades it adds up.

What I did was compare the conversion rates in my statement with the market rate at the same time. There was a small difference, as expected, and it was consistent. Nothing dramatic, but it's another cost for the list. When I factored it in, it changed the calculation for pairs where I was already working with a thin edge.

Some people choose an account currency to match the pairs they trade most. Others find it makes no difference. I'd say it's worth knowing and worth checking against your statement, rather than assuming it's zero.

[Fairman]

This is one of those costs nobody mentions. I checked mine the same way and the conversion margin was small but consistent, so it adds up for anyone trading a lot. One option some brokers have is an account in the same currency as the quote currency of the pairs you trade most. If most of your trading is on dollar quoted pairs, a dollar account removes most of the conversion. Worth asking your broker what options exist before assuming you have to live with it.

[Fairman]

Also worth knowing that the conversion affects how your risk is calculated. If the rate the broker uses moves during the day, the money value of a pip changes too, so the same lot size on the same stop can mean slightly different risk at different times. For most people that is tiny, but if you size very precisely, it is another reason to use a calculator that pulls the current rate rather than a fixed number in a spreadsheet.

[Shadow Trader]

The part that makes this leak bigger for scalpers is that conversion works on gross results, not net. Every win and every loss gets converted, so the cost scales with how much money moves through the account rather than with the profit left at the end.

img_13620_r1.png (52.86 KiB) Viewed 10 times

Say a month has 200 trades with an average result of 25 dollars either way, so about 5,000 dollars of profit and loss passes through conversion while the net for the month is 300. The chart (illustration) shows a made up markup of 0.2, 0.5 and 1.0 percent costing 10, 25 and 50 dollars, which is 3.3, 8.3 and 16.7 percent of that net.

Losses are not spared either. If the markup always works against you, a converted loss comes out slightly bigger than the same loss in the quote currency, so the leak shows on both sides of the ledger.

A same currency account is not always the full fix. If the main pairs are split between dollar quoted majors and yen crosses, one of the two groups still converts every result.

Has anyone asked a broker for the conversion markup in writing? Some publish it, and the number varies a lot.

[Shadow Trader]

The deposit and withdrawal side is often a bigger conversion cost than the trade side. If the card or bank converts at a 1.5 percent markup, a 5,000 dollar deposit loses 75 on the way in, and taking 2,000 of profit out later costs another 30.

That is a one off rather than a per trade leak, but it lands before the first trade is placed. On a small account it can be more than a month of the per trade markup.

The account currency is also an open position in its own right. If the account and the spending money are in different currencies, a 3 percent move in that exchange rate changes a 10,000 balance by about 300 in spending terms, without a single trade.

For review purposes that is one more reason to judge the month in R rather than money. R stays clean of conversion, while the money figure mixes trading results with currency moves.

Does anyone keep part of the balance in a second account in their spending currency? It seems a simple way to separate the two exposures.