What is Trading Dollars
Trading dollars refers to a breakeven point (BEP) in a financial or business transaction. In the foreign exchange market, the point where the gains on a trade equal the losses is trading dollars. In business development, the point where the company is spending as much money on a product in development as it can hope to earn on that product is trading dollars.
BREAKING DOWN Trading Dollars
Trading dollars can happen to any trading position, including stocks, options, and futures. The terms may also expand to other fields such as accounting and economics. As the words imply, an individual or business is merely exchanging money in the credit column for money in the debit column at par.
Trading dollars do not return a profit or a loss to the trader. However, they may be utilized to protect capital during a flat market. Because of the volatility of the foreign exchange market, trades may seem profitable until a sudden market movement is against the traded pair. Many traders will place stops around a trade for just that type of change. The sudden shift may trigger the stop closing the position at the zero-gain point. Also, a trader may close a position if they fear to experience a loss or did not trust their initial market analysis.
Forex traders will use a trading dollars or breakeven trading strategy in a volatile currency pair through the use of stops. A trader may place an original stop which, if met, would result in a loss. If the market moves in the trader's favor, they may reset the stop to the point where trade expenses equal the profit possibility thereby protecting their capital to use in another trade. The same strategy can help a trader who realizes a profit on a currency pair and closes only a portion of the trade. They may then move the stop to the trading dollars point, preserving capital but still keeping the trade alive for future profit.
Trading Dollars in Business Development
In business development, trading dollars is a situation that typically describes a waste of effort and resources. While the venture did not lose money, the allocation of capital could have been for a profitable venture. These business ventures are zero-sum games, where the business's gains are precisely balanced by its losses, or expenses, in product development or a particular business investment.
For example, a gold exploration company that spends $10 million to mine $10 million worth of gold can be said to be trading dollars. Likewise, an oil company that invests $5 million to extract only $5 million in the value of oil is trading dollars.
Trading Dollars For a Loss
The idea of sinking money into projects with a flat return on investment (ROI) is an unappealing one for most businesses. But another take on the concept of trading dollars was explored in a 2016 Wall Street Journal feature. In Zimbabwe, "a U.S. dollar is no longer worth a U.S. dollar," according to the article. "Money changers charge $102 in small notes for a $100 bill."
The odd scenario of trading dollars for other dollars at a premium was caused by the devaluation and concurrent appreciation of the U.S. currency against itself, the paper explained, which was a consequence of a Zimbabwe's economic crisis.
After years of hyperinflation, the country had been using U.S. dollar (USD) since 2009 hoping to bring stability to the economy. But a collapsing export market and expatriated dollars caused a shortage of the USD in the country. With the expectation that then-President Robert Mugabe would revive the Zimbabwe dollar as currency, American dollars in the bank were suddenly worth less than they were in cash. So as people began hoarding dollars or sending them abroad, the value of the remaining U.S. cash currency only grew.