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.

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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.

[FXS Prop Desk]

Conversion costs are a small leak that most traders never see. On a single trade they are tiny, but on hundreds of trades a month they add up. Some brokers apply a markup to the conversion rate, which makes the cost bigger than it looks.

One way to reduce it is to choose an account currency that matches the quote currency of the pairs you trade most. For many forex traders, a USD account removes most conversion steps, since many major pairs are quoted in dollars.

[Shadow Trader]

When an account is denominated in one currency and the traded pair settles in another, profits and losses must be converted. That conversion is usually done at the broker's own rate, and the rate may include a markup that does not appear on the trade ticket.

For a scalper placing many small trades, even a tiny markup applied to each closed position adds up. It is a cost that sits outside the spread and commission and is easily missed, because the statement may show only the converted amount in the account currency.

A comparison can be made by taking a closed trade, calculating the profit in the quote currency, and converting it at an independent market rate from the same minute. Any difference reflects conversion cost. Doing this across a handful of trades gives a sense of scale without needing broker disclosure.

The question also arises with commission, which is often charged in a base currency such as USD or EUR regardless of the account currency. Pip value changes with exchange rates too, so position sizing in a non-matching account drifts slightly over time. Checking the contract specification and statement terms for how conversion is handled helps avoid surprises.

[Shadow Trader]

Choosing the account currency looks trivial. It isn't always.

A trader based in a country where the local currency differs from the account currency pays conversion costs on every deposit and withdrawal. Those costs hit profits and capital alike.

Pip values also depend on the account currency. A strategy sized in dollars can change risk slightly as exchange rates move, especially on pairs where the account currency isn't one of the two.

Some choose the account currency to match the quote currency of their main pair, simplifying risk calculation. Others choose the currency in which they spend, minimizing conversion.

There's also the question of currency exposure itself. Holding the balance in a particular currency carries the exchange risk of that currency versus the trader's home currency, an effect that has nothing to do with trading performance.

A note for those depositing from a country with currency controls or large exchange spreads: the true cost of getting money in and out may exceed the cost of trading itself. Counting it as part of the strategy's expenses gives a more honest view of net profit.

How was the account currency chosen, and has the choice ever mattered in practice?