Pips and Leverage....

Quoting stockwet

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Assume you want to buy 1 lot of EURUSD, which is trading at 1.2800. The margin requirement on that at 1:100 leverage is 1,000 euros, not dollars. To convert it to dollars, multiply the margin requirement by the currency price. In our case, it would be 1.2800 * 1000 = $1,280. That's your margin requirement on 1 lot of EURUSD.

stockwet

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Quoting MrFuture

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Wow, I really appreciate your help fxgorilla, truly appreciated.

Ok, well, so basically I can throw out of the window the idea of making $1376.00 with only 160 PIPS starting with $4000.00 on the EUR/USD, correct ?

CORRECT.

This can only be achieved if I have a standard account then...ok, I see the little trick the demo accounts play then...

Ok, so let me get this clear. You are suggesting that with $4000 I should not risk more than $400 in one trade (10:1 true leverage), correct ?

NO. YOU SHOULD (IMHO) NEVER RISK MORE THAN 2% OF YOUR CAPITAL ON ANY SINGLE TRADE WHICH = $80. I KNOW PLENTY OF PROFESSIONAL TRADERS THAT RISK EVEN LESS THEN 2% PER TRADE. THE 10:1 TRUE LEVERAGE I REFERRED TO IS THE TOTAL OPEN POSITON SIZE VERSUS YOUR ACCOUNT EQUITY ($4000 ACCOUNT @ 10:1 CONTROLES $40,000 OF OPEN POSITIONS).

So let's say I do place a $400 trade on the EUR/USD, and I make 160 PIPS. How much profit would that be, in $ ? In other words, how do I find out the value of each PIP ?

IF YOU PLACED A $400 TRADE - OR IN OTHER WORDS - RISKED $400 ON ONE TRADE - THEN YOU WOULD BE RISKING 10% OF YOUR ACCOUNT ON A SINGLE TRADE. THIS IS FAR TOO AGGRESSIVE FOR EVEN A PROFESSIONAL TRADER. YOU COULD HOWEVER HAVE 5 TRADES OPEN, EACH WITH A 2%, WHICH WOULD SPREAD THE 10% RISK OVER 5 TRADES. THE TROUBLE IS, MANY CURRENCY PAIRS ARE HIGHLY CORRELATED. FOR EXAMPLE, A SHORT ON EURUSD AND LONG ON USDCHF IS ESSENTIALLY THE SAME TRADE, AND HENCE IN EFFECT IS ALMOST LIKE RISKING 4% ON A SINGLE TRADE.

I am trying to understand if I got it right...

YOU NEED TO START THINKING IN %RISK PER TRADE AND LOTS PER TRADE, NOT $ PER TRADE AS WITH STOCKS. I KNOW WHERE YOU ARE COMMING FROM, AS I WAS A STOCKBROKER FOR 7 YEARS. DO A SEARCH ON THIS FORUM FOR MONEY MANAGEMENT. WITHOUT PROPER MONEY MANAGEMENT, EVEN A HOLY GRAIL SYSTEM WILL FAIL! DON'T TRADE LIVE UNTIL YOU HAVE A 100% GRASP ON THE CONCEPTS IN MY 1ST POST.

Thanks

Future

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Quoting Darkstar

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All the above advice is good, but I don't think your original question was answered effectively. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>

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Most brokers will allow at least 50:1 leverage. Meaning your $4000 in cash can be used to purchase ~$200,000 worth of currency (is USD terms). So if you plunked down that $200,000 on say USD/JPY it would yield $17.23 per pip.<o></o>

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Coming from <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" /><st1lace w:st="on"><st1laceName w:st="on">Equity</st1laceName> <st1laceType w:st="on">Land</st1laceType></st1lace>, you’re probably quite familiar with managing your trades based on dollars at risk and there really is no reason why you can't continue that in the forex realm. If your comfortable risking say $500 on a trade you can either purchase $200,000 worth of currency with a ~29 pip stop OR you could purchase $100,000 with a ~60 pip stop. <o></o>

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So YES you could in theory have made the $1000 you sited with $4000 (technically you could have done it with $2000). The demo accounts are a materially accurate representation of what is possible. They fail to properly represent slippage in volatile conditions, but that will only be a pip or 2 in most cases. If you can make money on them, and you don't have any psychological baggage to deal with, you can make money in real. The trick is the psychology...<o></o>

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That having been said, until you come up to speed on the intricacies of the forex market, you should plan on risking significantly less.

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Quoting MrFuture

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Here we go, now I am confused again

First of all thanks for your input.

Now, when you are saying that I could have achieved the $1000 on the $4000 invested also on real life, are you taking into consideration that all I have is those $4000 in my account, or that I have $50000 like in the demo ?

See, I am planning to open a real account with $4000.00

Now, I heard it is too risky/crazy/stupid/not even possible(?) to open a traditional account with such amount, and that therefore a mini account would fit better. Is that true ? Now, wouldn't the mini account limit the value of each of the PIPs I gain/loose ? (in a mini acct a PIP is just $1, right? So 130 Pips would be $130 instead of $1300 of a traditional acct)

I am just trying to understand why you are saying that I could make the profit mentioned above while others have suggested the opposite.

Once again, as crazy as it might sound in the past 10 days I had 5 good trades on SIDUS system and each averaged 100-130 Pips. With $4K on the demo acct of $50k, those 100 pips were more than $1000, but how much are they going to be in real life if ALL I have in the account is $4000 and not $50,000 ?

My understanding is that if for example I got $4000 in my account, the most I can have in any trade is $2000, is that right ? I say this because from what I understand you need to have exactly the same amount as AVAILABLE MARGIN in case your trade of $2000 goes extremely bad (and please forget MM for a second, just look at it as an example).

So technally, if I had 4000 in my account, only up to 2000 could be used in a trade, allowing the other 2000 to act as collateral, correct ?

But all of a sudden I feel I got it all wrong, 'cause I just remembered that I read that what the brokers secure is $1000 for each lot in a traditional account and $100 in a mini.....I am going crazy I think...

Please enlight me


Thanks

MrFuture

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Quoting Darkstar

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First off, you should setup a demo account with Oanda (www.fxtrade.com) which will make your learning process significantly easier. With them you can set trade size to any increment of $1. So if you wanted a position size of $13,765.00 they will let you do it...

Anyway, MM aside, you can trade up to the max leverage your broker will allow. Oanda allows 50:1 leverage on opening positions but 100:1 once its open. So lets do some quick math:



You have $4000. <TOTAL p deposited)< real account balance (cash you>


50 X $4000 = $200,000. <THIS p you open.< is the maximum position can>


$200,000 / 100 = $2000. <THIS p account you is the call.< minimum ammount of deposited cash must have in your to avoid a margin>


A $200,000 position on USD/JPY would equal $17.22 per pip. <THE p is to present...< math too complicated explain at>
So this $200,000 position can move against you ~116 pips before the broker would close it on you. This loss would reduce your $4000 account to $2000.

You could reduce your risk by setting a stoploss X number of pips from your entry:

30 pip stop X $17.22 = $516.60

If you are comfortable losing $516.60 of your $4000 account, then there is no restriction on you doing so.

Alternatively, a 100 pip move in your favor would add $1722.00 to your $4000 for a total of $5722.00



The (4) 100 pip sidus trades you made would have increased your real cash account balance to $10,888.00 <YES p money< that would be spendable>
As you can see, the winnings you have produced on your demo are quite possible. But I must reiterate that until you have vastly more understanding/experience in this particular market, you should trade MUCH smaller position sizes. Leverage is a double edged sword and you very easily could have blown your account had you lost those 4 trades.

With a $4000 account you should not exceed a 10:1 ($40,000) position. This will yield $3.44 per pip and will keep you in the game long enough to figure it out...

EDIT: Standard noob MM math works as follows:

$4000 account balance X 1% = $40

$40 / 30pip stop = $1.33 /per pip

To get this you would need a position size of $15,500 on USD/JPY

Each time you win or lose a trade you run the calculation against your new account balance.

It's a good system when your starting out and you should probably use it. I only told you all of the above because you asked...

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Quoting MrFuture

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Hey, thank you very much for your help

So, in the end was I right when I said that out of a 4000 balance, only up to 2000 can be traded at a time, leaving the other 2000 as a collateral ? (same thing as if the account was 10,000, I would invest up to 5000 because the other 5000 has to be there in the account to secure my investment) Is this correct ?

I am confused because on a broker website I read that what is secured is the $1000 you would use to buy a lot of 100,000, and therefore that same $1000 is the collateral. But on other places I have the feeling that you need an additional $1000 that has to be in the account and not traded anywhere to be ok with the broker. Therefore I buy one lot using $1000, in order to do that I need to have another $1000 on my account so that if anything bad happens with my orginal $1000, the other $1000 deposited will cover for the loss.

What is the truth ? (and please keep playing along and forget the MM...all I want to understand is how the whole leverage/margin system works).

Oh and last thing: does increasing the number of lots I buy, say 100K compared to 400k, change the value of each PIP ? At first I thought it would, but then I saw on my demo account that they are the same, only difference is that the pips seem to make bigger moves with larger lots..is that right ? So the only thing that affects the pip value is the levergae you chose ?

Thanks once again for your help

Future

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Quoting Darkstar

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EDIT: The leverage ratio does not in any way affect pip values. It is only used to determine a)your maximum purchasing power and b) the minimum amount of capital you must maintain to hold a position open.

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Quoting MrFuture

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Stockwet, thank you. While you were answering, I did an edit to my post and added a question:

Still one thing is not clear to me: how does the levergae ratio affect my return ? In other words, broker A gives me a standard account of 100:1, while stock B gives me a standard account at 50:1. Now, being both standard accounts, they both should have a PIP value of approx $10, right ? So what will differ in my return/pip movement of the pair when comparing both scenarios ?

Thanks

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Quoting MrFuture

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Stockwet, thank you. While you were answering, I did an edit to my post and added a question:

Still one thing is not clear to me: how does the levergae ratio affect my return ? In other words, broker A gives me a standard account of 100:1, while stock B gives me a standard account at 50:1. Now, being both standard accounts, they both should have a PIP value of approx $10, right ? So what will differ in my return/pip movement of the pair when comparing both scenarios ?

Is it, and I am just guessing, that while in both cases the PIP value remains $10, for every PIP I gain in account B, I woulg gain 2 in account A ?

Thanks

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Quoting stockwet

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Now, money management comes into play because you wouldn't want to max out your entire equity on a single position. In other words, you wouldn't want to trade 40 mini lots with 100:1 leverage on a $4000 account. You'd get a margin call pretty quick. That's why earlier I said I don't even care about leverage because I wouldn't come close to risking that amount of money on a single trade. But, that's my system. Others do things differently.

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