Help understanding a few basic concepts

Beginner Questions
#1

Hello folks,

I have spent the last 2 months studying this website and making demo trades. While I can say I understand the more advanced concepts, it’s the more basic ones that I have trouble fully understanding, or is just confusing (I tend to overanalyze the basics sometimes). I understand the charts, but I have trouble grasping the meaning behind all the stuff going on: Hope someone can help clear this stuff up:?

[B][U]1. [/U][/B]How do I calculate the inital investment (margin) for each lot? Is is ALWAYS $1,000 for a standard, $100 for mini and $10 for micro?

Then, how do I figure out how much $, in terms of pips, to risk as a stop loss?

[U][B]2. [/B][/U]I can’t word my next question just right, so maybe a “fill in the blank” response from you folks would help better… here goes:

When going long on USD/JPY, I am hoping for or expecting _______________
so I can make a profit

I guess, I’m wondering, when one goes long, the pair, say the same USD/JPY, are we hoping to get less yen per dollar, or more, and how would that translate back into profit? What currency am I holding while waiting, and if I short the USD/JPY, this means I’m buying USD with Yen, right? Well, where the hell did I get the yen from? :confused: I’ve read many explanations, but I just can’t understand how.

[U][B]3.[/B][/U] Ok, so if you are buying euros and selling usd, and the exchange rate is 1.18, then wouldn’t you have to put up $1,180 as margin for the lot, and not $1,000?:confused:

It seems that these concepts dissolve into the charts, meaning that these concepts are displayed in a different way than one visualizes in their minds because of the chart converting the info into another form. Meaning, buy if you expect the bars to go up, and short if you expect them to go down, right? We’re not sitting around making trades saying “well, I anticipate that the USD will appreciate relative the Pound, so I will go long”, or do traders think in those terms and not in “chart mode”?

Ehh. Hope I haven’t confused you folks… Am I making it harder to understand than it really is? Because all the concepts past 2nd grade have been incredibly easy to grasp, the basics confound me, becuase I do tend to overanalyze. Is there any info you guys could give me to smooth these concepts out? I’d be forever grateful.:slight_smile:

#2

Margin requirements are based on two things - the size of the position in question in terms of your account’s currency ($ for a $ account, GBP for a GBP, etc) and the leverage ratio.

If you have a USD account and you are trading a position equal to $100,000 at a leverage ratio of 100:1, then your initial margin requirement will be $1000.

Pip values depend on the currency pair in question and the size of the position. For a USD denominated account, where the USD is the quote currency, not the base currency in the pair, the pip values will be stictly based on the position size, whereas when the USD is the base currency it will fluctate with the exchange rate as well.

[U][B]2. [/B][/U]I can’t word my next question just right, so maybe a “fill in the blank” response from you folks would help better… here goes:

When going long on USD/JPY, I am hoping for or expecting _______________
so I can make a profit

The USD to appreciate against the Yen - or the Yen to depreciate against the USD. Your position (long or short) is always in terms of the first currency - which is the referred to as the base currency.

[U][B]3.[/B][/U] Ok, so if you are buying euros and selling usd, and the exchange rate is 1.18, then wouldn’t you have to put up $1,180 as margin for the lot, and not $1,000?:confused:

That is correct. As I noted above, the margin is based on the [I]value[/I] of the position in your account currency terms, not the [I]size[/I] of the position.

It seems that these concepts dissolve into the charts, meaning that these concepts are displayed in a different way than one visualizes in their minds because of the chart converting the info into another form. Meaning, buy if you expect the bars to go up, and short if you expect them to go down, right? We’re not sitting around making trades saying “well, I anticipate that the USD will appreciate relative the Pound, so I will go long”, or do traders think in those terms and not in “chart mode”?

Most traders probably think in pair terms (USD/JPY vs USD relative to JPY) because most folks trade technically so they look at charts. Those who think on fundamental terms will, however, think of currencies seperately in many cases as you have outlined.

#3

Thank you very much for taking the time to explain those points.

Still, on the 2nd point, the USD appreciating vs. Yen means we want more yen per dollar, which ultimately means that the Japanese economy is doing “worse than before” compared to the US economy, correct?

Would it be safe to say that when we go long, we are concerned ONLY about the Japanese Yen at that point? Or,would “market moving” reports (for the USD or against the USD) have an effect on the pair?

Just one more thing and I swear I’ll stop asking newbie questions:

So, say, on a mini lot, I think to myself “ok, on USD/JPY, I want to go long, and I want my maximum risk to be $200”… how would I calculate where to put a stop loss, and would it be any different for the same type of trade on USD/GBP?

I apologize, it’s hard, especially for a new trader, to convey what he is thinking without getting too involved and intricate. I hope those questions made sense, and I thank everyone from the bottom of my heart for helping with this matter. It takes character to be willing to help a fellow trader out. -Thank you.

Rod, DecalService

#4

To your first question, no. There are a great many things which drive forex rates. Economic factors are not the only ones and in some cases aren’t even important considerations.

To your second question, again no. If you are long USD/JPY you are in a position by which things that impact both the USD and the JPY (meaning either one sigularly or both simultaneously) are considerations. Trading forex means trading the relative values of currencies against one and other. Whatever impacts those relationships impacts your trading results.

So, say, on a mini lot, I think to myself “ok, on USD/JPY, I want to go long, and I want my maximum risk to be $200”… how would I calculate where to put a stop loss, and would it be any different for the same type of trade on USD/GBP?

Firstly, USD/GBP is not traded. You would only trade GBP/USD. It’s the same relationship, obviously, but there’s a practical difference.

A mini lot of USD/JPY is $10,000. To figure out a $200 risk you would have to figure out the pip value and then divide the $200 by that. (I do not recommend this approach to risk management, by the way). The value of a pip in USD/JPY varies based on the rate. Basically, it’s .01/R x Size where R is the current exchange rate.

With GBP/USD a mini lot would be 10,000 GBP. Because USD is the quote currency the pip value is fixed at .0001 x Size, which would be $1 for a mini lot.