I’m really unsure of what this lesson is trying to get across in terms of the distinction between the two examples it uses. For one, i don’t really understand the language at the beginning of each example…
1. "If your account denomination is not in the currency pair traded, but the same as the conversion pair’s counter currency…"
2. "If your account denomination is not in the currency pair traded, but the same as the conversion pair’s base currency…"
The difference is obviously at the end (base vs. counter)… but if your account denomination is not in the pair, i don’t see how it could be the same as either of the currencies. Further, the calculations of the two examples is exactly the same (unless im overlooking something). As far as i can tell, i fully understand the math behind what they’re showing, i just dont really understand the way its being described - which makes me question my understanding.
Your account currency is not in the pair being traded.
But there is a second pair — the “conversion pair” — involved in these calculations, as the following discussion will illustrate.
It’s easy to get tangled up in terminology, and maybe that’s what is happening here.
The two examples you are trying to sort out both include 3 elements: (1) your account currency, (2) the pair you are trading, and (3) the conversion pair. Let’s be clear about all three.
(1) Your account currency. The BP lesson calls this “your account denomination”.
(2) The pair you are trading – this should be self-explanatory.
(3) The conversion pair. This is the pair used to convert P/L in the pair traded into your account currency.
In the first of the two examples in the BP lesson, the account currency is USD, the pair being traded is EUR/GBP, and the conversion pair is GBP/USD.
In the second example, the account currency is CHF, the pair being traded is USD/JPY, and the conversion pair is CHF/JPY.
The BP lesson is using all of this to calculate position sizes.
It might clear things up for you, if we start with a completed trade and work backward. The advantage in doing this is that we can skip the portion of the calculation related to risk and stop-loss.
Let’s use the BP examples in this “backward” (reverse) explanation.
• In the first BP example, your account is denominated in USD, and you are trading EUR/GBP. Let’s say you have just closed a one-mini-lot trade in EUR/GBP, for a profit of 40 pips. Let’s see how the three elements listed above factor into the dollar-profit that gets posted to your account.
Initially, your profit will be generated in the counter currency of the pair being traded, not your account currency. That is, your trade produced a profit of 40 GBP-pips, which is worth 40 pips x £1 per pip per mini-lot = £40. That great, but your account is in USD, not GBP, so the GBP/USD pair (that is, the current price of the GBP/USD) must be used to convert £40 into dollars. If the current price of GBP/USD is 1.3080, then your profit in dollars is £40 x 1.3080 = $52.32, and this is the P/L that will be posted to your account.
• In the second BP example, your account is denominated in CHF, and you are trading USD/JPY. Let’s say you have just closed a one-mini-lot trade in USD/JPY, for a profit of 40 pips. Let’s figure your profit in Swiss francs.
Initially, your profit will be generated in JPY, the counter currency of the pair you are trading. That is, your trade produced a profit of 40 JPY-pips, worth 40 pips x ¥100 per pip per mini-lot = ¥4,000.
But, your account is in CHF, not JPY, so the CHF/JPY pair must be used to convert ¥4,000 into francs. If the current price of CHF/JPY is 110.70, then your profit in francs is ¥4,000 ÷ 110.70 = 36.13 CHF.
In your post, you mentioned the similarity between the calculations in the two BP examples. In the “reverse” examples above, the only difference between the two examples is whether the profit generated in the counter currency of the pair traded was multiplied or divided by the price of the conversion currency.
Forex trading involves a lot of math, and convenient calculators have been created to do this math. Experienced traders use the calculators, rather than doing math by hand. But, when you’re first learning about this stuff, the BP school wants you to know the logical basis for these calculations — rather than simply saying “it’s such-and-such, because the calculator says so”.
I hope this has cleared up your confusion.
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Note: If you don’t understand where I got £1 per pip per mini-lot (in the first example), and ¥100 per pip per mini-lot (in the second example), write back, and I’ll run through it.
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