FX Risk

I pay particular attention to three key factors when considering the FX risk associated with a trading algorithm.   These are the Account Currency, Base Currency and the Profit Currency.   I have seen many risk management calculations explaining that if I trade a mini lot of the EURUSD, then the risk associated with a pip is $1.   However, if my account currency was say GBP instead of USD, then I introduce another exchange rate into the calculation which makes the risk calculation more confusing.

It is perhaps easier to explain my concern with FX risk using some examples of data collected from two different symbols at two different times:

Time	21:49	21:57	21:55	21:59
Symbol	EURGBP	EURGBP	EURUSD	EURUSD
Profit Currency	GBP	GBP	USD	USD
Base Currency	EUR	EUR	EUR	EUR
Account Currency	GBP	GBP	GBP	GBP
Bid	0.85753	0.88765	1.18713	1.18713
Tick Size	0.00001	0.00001	0.00001	0.00001
Tick Value	1	1	0.747736229	0.747646782

 

As you can see, the Risk associated with a tick size of 0.00001 does not change with time if the Profit and Account currency are the same, however if the Profit and Account currency are different, then the risk associated with one tick can change over time as does any risk calculations associated with that symbol.

As a general principle, I prefer to trade in instruments that have the same profit currency as the account currency, for example EURGBP in a GBP account or the FTSE in a GBP account.   EURUSD in a USD account, or the DAX in a EUR account would also be easy to understand.   That is not to say that I wouldn’t consider other symbols, but I would need to pay particular attention to the FX risk associated with the algorithm.