A very important part of our trading is keeping track of our profits and losses. This is fairly straight forward for a share / CFD trader, as their profits will tend to be in the one currency (for example, if you are trading in Australian share CFDs, your profits and losses will be in Australian Dollars).
If you are an FX trader though, your profits and losses can be denominated in multiple currencies. Let’s go through an example.
Every FX transaction involves two currency pairs, for example, FXADUS measures the value of one Australian Dollar in terms of US Dollars. If the FXADUS is trading at 0.9000, it means 1 Australian Dollar buys 90 US cents. The profit/loss on a currency trade is always denominated in the second currency – in this case, the US Dollar.
So if you trade in the FXADUS, your profits and losses will be in US Dollars. Of course, you have the choice of trading the FXUSAD chart. This chart represents the value of 1 US Dollar in terms of Australian Dollars. In this case, your profits and losses will be in Australian Dollars.
If you trade the FXUSJY, your profits and losses will be in Japanese Yen. If you trade the FXEUBP, your profits and losses will be in British Pounds.
Let’s take an example of a trader who trades in the FXUSJY. They start with an account size of $A20,000. They make a profit of 1,000,000 Yen, which is worth around $A12,500 if one Australian Dollar buys 80 Yen (1,000,000/80 = 12,500)
This means their account will now have two separate balances – they still have 20,000 Australian Dollars, but they also have 1,000,000 Yen. I always joke that if people want to experience the feeling of being a millionaire, they should start by dealing in Yen. Besides, it’s just such a good market to trade!
Now technically, if 1,000,000 Yen is equal to around $A12,500, the trader has an account worth $A32,500.
However, currency values are always fluctuating. The FXADJY is the value of the Australian Dollar against the Japanese Yen. When the FXADJY is trading at 80, then 1,000,000 Yen is worth $A12,500. If the FXADJY rises to a value of 90, then 1,000,000 Yen is only worth $A11,111.11 (1,000,000 / 90 = $11,111.11). Even though the trader was not in any trades, they have lost around $1400 due to the currency fluctuation.
There are a number of ways to deal with this issue of ever fluctuating currency values. We will assume you wish to deal primarily in Australian Dollars.
One way is to immediately convert all foreign currency values back into a single currency. For example, whenever you make a profit in say Euros, or Pounds, or Yen, you can convert these values back to Australian Dollars as soon as you close the trade, thus locking in the gain.
Another way is to keep track of all the Australian Dollar cross-rates. For example, track the value of the FXADUS, FXADEU, FXADJY, etc. That way you can look to convert the currencies into Australian Dollars at more favourable times and prices.
Or, you can decide to convert all balances into Australian Dollars at the end of the week, month, quarter or year.
There are many options – none of which are the “right” or “wrong” way to do it. I think the best thing to do is to choose a strategy that suits you, and stick with it.
Don’t forget that trading is a business, and always needs to be treated as one, and that means keeping good record.