using / trading on Margin. I am brand new to the Forex market and am trying to grasp how to quickly and efficiently calculate how much out pf pocket it will cost me to enter into a trade as well as what my Risk will be and Profit will be given my personal Risk management and Profit Targets. Thanks for the help and the time - Mike
To determine how much it will cost you to enter a trade:
The spread is the price difference you pay for one full transaction.
So for insance you are trading the EUR/USD market and its price is:
EUR/USD 1.2997/1.2998 (the difference is 1 pip which translates into $.0001)
so lets say u open a position of 10,000 units (or 10 micro contracts)
When you close this position, u will have paid 10,000 x .0001 = $1 for the transaction
Your profit or loss will be $1 (10,000 x .0001) per pip loss or gain
There are different ways to look at risk, if u set a stop loss at say 50, your total risk is the number of pips risked x $1 per pip which would be $50.
If you set a “Take profit” of say 200 pips, your total reward possiblity would be 200 pips x $1 per pip which would be $200.
Your “Risk vs Reward” ratio is 200/50 so 4:1. But, since your “take profit” is 4x further away then your “risk”. Therefore you are 4x as likely to lose the trade.
So:
25% chance the trade will succeed, gaining you 200 pips ($200)
75% chance the trade will fail losing you 50 pips ($50)
I sometimes get confused how much a “pip” is. The easiest way to remember is that 1 pip is 1 one hundredth of a cent or 100 pips = $.01
This is only for JPY pairs, and others which are quoted to 2 decimal places (3 if you count pippettes). For the 4 decimal place pairs (5 with pippettes) - such as EUR/USD, USD/CHF, etc. - a pip is 0.0001.
And whether that’s a cent or fraction of a cent ($0.01, $0.0001) depends on whether you’re talking about a USD quote pair or not. The quote currency is the second one is the pair (USD in the case of EUR/USD), such that the rate quoted is X amount of the quote currency is worth 1 of the base currency. Thus, a USD/JPY quote of 95 means one USD is worth 95 JPY. That means a pip (0.01) is 1/100th of a JPY.