FX Practice trading account - am I at a disadvantage?

Factual Questions
1

I’m trying (and failing) to wrap my head around this problem, perhaps the financial gurus here can help me?

I opened an FX practice trading account (i.e., not real money) just to learn a bit about the whole thing. A friend in the USA is also doing the same and we will see who comes out ahead at the end of the year. So because I’m based in Japan, I elected to open the account with Japanese Yen, and he in US dollars. The company that provides the practice account opens all the accounts with a starting balance of 100,000 ‘units’, in whatever currency you nominate.

My account: 100,000 yen
His account: 100,000 US dollars

Now because the Yen currency is based on the smallest unit of currency in Japan, the Yen (which, let’s just say is equivalent to the US penny, for the purposes of this exercise) and the US currency is based on the dollar (100 pennies), then 100,000 yen does not equal 100,000 dollars. 10,000,000 Yen equals 100,000 dollars.

So I’ll be starting with less actual capital than he will be starting with, which means I’ll be more vulnerable to margin close outs if I try to trade at the same volume that he does.

Is that correct, am I at a disadvantage here? Or am I just being a whiney pussy? :stuck_out_tongue:

Bonus question: The company that provides this practice account also provides a real money service. And because they don’t seem to acknowledge that the Yen is - how do I say it? - based on a currency unit that is two orders of value lower than the dollar? (if I’m explaining that correctly), should I open a real money account, can I trust them to handle the actual yen value correctly? That is, if I deposit 1000 US dollars, will they credit my account with 1000 yen? I’d really like to avoid having to sort that kind of mistake out.

2

I don’t see how you are at a disadvantage as long as the competition is decided by rate of return and not total value of return. If total value, well, it’s much easier to make a dollar with a thousand dollars than it is with a hundred dollars.

I would expect any legitimate foreign exchange brokerage to know quite well the difference between yen and dollars.

3

Yeah I guess you’re right IAmNotSpartacus. Rate of return should be the measure. And I guess if margins are calculated based on % of account value, then I’m at no disadvantage there either. I’ll shut the hell up. :stuck_out_tongue:

4

I see a couple potential problems, but my disclaimer is that I am not an expert to be relied on

  1. I don’t know what the cost of the most expensive stocks are, but is it conceivable that there will be some items that you just cannot buy that your fiend can?

  2. A somewhat related is that you won’t be able to diversify your portfolio as much as your friend. If you both have the same amount of the same three stocks and the value sinks, your friend might have five other stocks doing well that will cushion the blow. You may not have as much of a cushion.

5

FX is foreign exchange, as in currencies. There is no stock or companies involved. Simply put, it’s arbitrage.

6

Do you have to buy in certain minimum increments? Then the second item could conceivably be an issue, depending on how many currencies your are trading in. The fewer currencies you are invested in, the more of a bump (up or down) there will be to your net profit in case one sails or tanks. It’s an “eggs in one basket” risk issue.

Perhaps it’s not really applicable to this market, but it’s the only distinction I could think of that might make a difference.

7

Is there a brokerage “fee” for transactions? Since those usually have a fixed value (or a fixed value per share), you’re going to be paying a TON more of your capital (as a percent) per traded share than your friend, almost certainly enough to eat up any investing difference. For example, if it’s 10,000 yen or 10 dollars per trade (assuming a 1000 to 1 conversion), You can’t make more than ten trades without eating all your capital, while your friend can make ten thousand of them.

8

I would be truly surprised if they had any problems with that once you make the transition to real money (assuming this is a legitimate operation and not a scam). Any errors like that are likely to be weeded out in early alpha.

I’d guess that the reason the practice accounts are not “fair” is that using them to compete with other people was not a use case they were planning for when they set them up. From their point of view, it’s not meant to be a two person game anyway, so why care whether or not the initial conditions are fair.

9

I’m a computer programmer. I do this for a living. I design automated trading systems on the money market - for banks.

Yes, quite simply, you’re at a disadvantage - kind of. So long as you make your trades 100 times smaller (in relative terms) the profit and loss percentages should still be much the same for both you and your friend - assuming you follow identical strategies and methodologies.

However - with smaller LOT sizes you often don’t get “filled” as easily as larger LOT sizes. Also, since the beginning of August the JPY has been unofficially pegged to the USD at approx 76 yen per dollar. It has been as smooth as a lake since that time. The key to success with FX trading is multiple currenices trading 24 x 7. Realistically, only computer systems can do that.