When you open a Forex trading account one of the first things you need to decide is the deposit currency you wish to use. There are many different currencies you can choose from (these are mainly USD, EUR, GBP, AUD, JPY and CHF) and each one has a particular set of advantages and disadvantages inherent to it. However which one is more appropiate for you will depend tremendously on your particular investment goals and how frequent you wish to withdraw capital from your account. Depending on what you intend to use your account for the ideal currency may change and what appears to be the “best choice” for one case might not be the correct one for another. On today’s post I am going to be discussing the issue of choosing an account’s deposit currency and the factors you need to take into account when doing so.
Why is the account deposit currency important? When trading the Forex market your deposit currency is relevant because all your profits will be given in this particular currency. Therefore if you have an account open in USD all your profits will be in USD and the purchasing power and value of your profits will change with the value of your deposit currency against its counterparts from other countries. However the first thing that needs to be clear is that you should avoid your account deposit to be a speculative position in general. This means that you shouldn’t choose a deposit currency just because you “believe” that this currency will appreciate against another or because you believe it to be safer. Overall speculation should be a part of actual trading and it should NOT be a part in the decision of trading account deposit currency because speculating with account deposit adds a very important factor of uncertainty (it’s like your whole account is an unleveraged trade on one pair).
So how do you choose your deposit pair? First let us think about your goals. For most people an account’s profits will eventually be spent where they live so the most sound decision is to use an account deposit currency which matches your local currency. This way you won’t be playing any speculative bet with your account deposit as you simply do not have to exchange you currency for anyone when you take out your deposit. Choosing a currency which is different from your local currency is a bad idea – especially if you intend to withdraw frequently – because every withdrawal will imply a Forex transaction which will take the spread out of your trading profits. In general if you have a doubt about which currency to use you should always choose your local currency.
Now what happens if your local currency is not offered? This is a very interesting scenario because it poses the problem of needing to speculate with your account balance as you’re simply not able to trade with your local currency. The best decision when this happens is to trade two accounts with two sides of one pair which may be oppositely correlated to your local currency. For example you can get an account in USD and another in EUR and this will act as a hedge to account deposit speculation which will reduce your exposition to currency value changes. Of course the hedge is not perfect and you may incur higher long term withdrawal charges but this may pale in comparison to what would happen if you expose yourself to a single currency exposure (for example if your local currency drastically appreciates against the USD and you only have a USD account).
What happens if you do not know what currency you’ll be spending? If you’re making a long term investment and you simply do not know what currency you’ll be spending whenever you’ll be making withdrawals then the best choice is to choose various currency pairs which will imply a similar net final final outcome despite of the changes that may happen between all of them. For example you may get a CHF/USD/EUR/JPY account combination which will enable you to be protected against various global scenarios. Since you do not intend to make withdrawals in a long time this account setup protects you against possible oscillations in exchange rates and the increase in overall exchange costs in the end will be negligible as your investment will be hopefully much larger by then. You can also increase capital additions steadily between all accounts until you start making withdrawals.
Now another very interesting option is the use of gold based accounts. I am particularly against this option because it ALWAYS implies and exchange commission payment on withdrawals and you CANNOT withdraw physical gold from your broker. When trading on a gold account you’re in fact making a XAU/PPP long trade where PPP is the currency you wish to make your withdrawals in and therefore you’re always putting yourself at a speculative risk because – as I just mentioned – the gold is not physical but merely similar to a permanent long spot gold contract. Remember that in the Regan days gold lost almost 70% of its value in less than two decades so the idea that is a permanent and irrefutable store of value is not bound to be always true in the medium term.
Long story short, your best choice when choosing a deposit currency for a Forex account is to choose the currency you’ll be using locally as this will imply a reduced transaction cost when withdrawing (no exchange) and it will also preserve your purchasing power relative to the country where the currency is being used. Certainly if you don’t know where you will be spending your money (or you want to play a long term bet) the use of a mixed basket of currencies is also an excellent choice. However the important thing to remember here is that you do NOT have a crystal ball and making speculative bets with your account deposit is NOT a wise choice. The idea of a long term deposit should be to reduce costs and decrease exposure and not to attempt to catch from a “feeling” or “belief” that a certain global macro-economic picture will play out. Remember, play your cards so that you’re prepared for every scenario and in the end your chances of failing will be greatly reduced :o)
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