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Best Way to Trade Foreign Markets Forex Accounts & Statements Forex Traders
Forex Accounts and Statements
Although the trend today is towards all transactions eventually finishing in a profit and loss based on the US Dollar it's important for you to realize your profit or loss (P&L) may not actually be in US Dollars. From my observation the trend is more pronounced in the US as you would expect. Most US based traders assume they will see their balance at the end of each day in US Dollars. I have even spoken with some traders who are oblivious to the fact the their profit may have actually been based on the Japanese Yen and Japan's Yen trading market.
Let me explain a little more. You sell (go short) USD/JPY and as such are short USD and Long (bought) JPY. You enter the trade at 116.10 and exit 116.90. You in fact made 80,000 Japanese Yen (1 lot traded) not US Dollars. If you traded all four major currencies against the US Dollar you would in fact have made or lose in EUR, GPY, JPY and CHF. This might give you a ledger balance at the end of the day or month with four different currencies. This is common in London.
They will stay in that currency until you instruct the broker to exchange the currency you have a profit or loss into your own base currency. This actually happened to me. After dealing with mainly US based brokers it had never occurred to me that my brokers statement would be in anything other than in the US dollar bill. This can work for you or against you depending on the rate of exchange when you change back into your home currency. Once I knew the convention I simply instructed the broker to change my profit or loss into US Dollars when I closed my position. It is worth checking how your broker approaches this and simply ask them how they handle it. A small point but worth noting.
It's a sad fact that for many years the forex market largely remained unregulated. Even today there are many countries that still don't regulate companies that trade forex. London has been regulated for many years and the US is now getting its act together and has also started regulating companies dealing forex. It was only recently in the US you could with no more than a website and a few thousand dollars set up your own forex operation and give the impression that you were larger than you are. I am all for the entrepreneurial flair and everyone need to start somewhere but when dealing with people's money it is imperative that the company you choose is solid.
Preferably you want a company that is regulated in the nation it operates in, insured or bonded and has some kind of track recorded. I cannot advise you on which broker you should use as there are just to many variables to each person, but as a rule of thumb, nearly all countries have some kind of regulatory authority who will be able to advise you. Most of the regulatory authorities will have a list of brokers that fall with their jurisdiction and will give you a list. They probably wont tell whom to use but at least if the list came from them you can have some confidence in those companies. Once you have a list give a few of them a call, see who you feel comfortable with, ask for them to send you their polices and procedures. If you live near where your broker is based, go spend the day with him. I have been to many brokerage firms just to check them out. It will give you a chance to see their trading operation and meet them.
This brings up another interesting point. When you open a forex-account with a forex-broker you will have to fill in some forms basically stating your acceptance of their polices. This can range from a 1-page document to something resembling a book. Take the time to read through these documents and make a list of things you don't understand or want explained. Most reputable companies will be happy to spend some time with you on this. Your involvement with your futures broker is largely up to you. As a forex trader you will probably spend long hours staring at the screen without talking to anyone. You may be the sort of person who likes this or you may be the sort of person who likes to chat with the dealer in the trading room. You will normally get a call once a week or once a month from someone in the brokerage asking if everything is OK.
Before we move on to account statements, I want to touch on segregation of funds. In times past there was a danger that traders who deposited money with their broker who did not segregate their clients money from their own companies money were at some risk. The problem arose if the broker misused the deposited funds to either reinvest or otherwise manipulated these deposits to enhance their own standing. There were also instances were the broker became insolvent and many complications ensued as to what was the clients money and what was the broker's money. With the advent of regulation most broker now segregate their clients funds from the brokerage funds.
Margin deposits are normally held with a bank or other large financial institutions who are also regulated, bonded or insured. This protects you money should anything happen to your forex broker. The deposit taking institution is normally aware that these deposits are client's funds. Depending on regulation in the particular country you live, each client may have their own segregated account or for smaller depositors they may be pooled. The point is that segregation of funds is a safeguard. Ask your commodity broker if your funds are segregated and who actually has your funds.
Just as with a bank you should are entitled to interest on the money you have on deposit. Some broker may stipulate that interest is only payable on accounts over a certain amount but the trend today is that you will earn interest on any amount you have that is not being used to cover your margin. Your broker is probably not the most competitive place to earn interest but that should not be the point of having your money with him in the first place. Payment on your account that is not being used and segregation of funds all go to show the reputability of the company you are dealing with.
In this section I will discuss briefly the basic account statement. I have to keep this basic as there are as many flavors of account statements as you can imagine. Just about every broker has their own way of presenting this. The most important thing is to know where you stand at the end of each day or week. Just because your broker is web-based and has all the bells and whistles does not mean they are infallible. Many of the actions taken before information is imputed are still done by hand and if humans are involved there will be a mistake at some point. The responsibility lies with you. It is your money so make sure that all the transactions are correct.
FX Some Company New York Statement for: Mr. Joe Smith Statement Date: 16th July 2002 Account No: 123456 Summary Of All Trades From: 15/07/05-17/07/05
|Ticket #||Time||Trade Date||Value Date||B/S||Symbol||Quantity||Rate||Debit||Credit||Balance|
Total Equity $10,200
Margin Available $9,200
Margin Requirements $1,000
Current Position Short USD/JPY
Normally there is a ticket or docket number to help identify the trade. You will nearly always find the time and date of the trade. The value date if the currency were to be delivered. You should always see the direction of the trade, buy or sell (Long or Short). The amount and rate you bought or sold. Balance to let you know if you made a profit or a loss. You should also see any open positions you may have and the margin requirements for that position. A lot of the more modern systems will show your open position as though it has been closed just to give you an up to the minute balance.