Hi y’all!

So, how does trading forex actually work? I want to achieve a good understanding of the proces. So, this question is not about the strategy or risk management, but to understand the proces and the logic.

I think this is important to know what you’r doing (and keep motivated).

I thought, I will share my thoughts here, and you can shoot where I go wrong in my understanding.

This is how I understand it so far:

**phase 1:** Expectation

After some analysing, I expect the euro to rise against the dollar.

This is my starting position:

- I have 2000 euros in my wallet.
- I’m using a leverage of 1:30.
- Explanation of leverage: To trade with 20,000 euros I need at least 1 30th of this amount.

1 30th of 20,000 is 666.6666. - 666.66 fits in my 2000 euro account. So I can trade.
- I want to risk 1% of my wallet with each trade (€20).
- I want a stop loss of 40 pips (so the price can go up or down 40 pips, before I’m out of the trade).

**phase 2:** Choosing the right lot size

So, I have €2000 and I want tot trade with 1% risk and 40 pips.

*What lot size do I need?*

First we calculate the needed value of 1 pip.

If 1% of 2000 is €20, then, a single pip needs to be:

20 (euro) / 40 (pips) is 0.50.

So, each pip must be worth 0,50 cent.

*How do we calculate the lot size to get 1 pip be worth 0,50 cent?*

First we calculate 1 pip of a currency, for example the USD:

1 pip (0.0001%) / 1.22097 (for now the exchange rate of the dollar) = 0.0000819.

In order to get this 0.0000819 to 0,50 cent I need to multiply it with 6000.

I actually do not have a formula for this. Just a few trial and error (tips are welcome!).

*What is 6000 in lot size?*

We know that 100,000 is 1 standart lot.

So, 6000 is 0,06 standard lot (or 0,6 minilot, or 6 microlot, or 60 nano lot).

**phase 2:** Place the trade

I place a buy order with a ticket of 0.06. I put the stop loss at 40 pips below the entry, and the take profit at 80 pips above the entry. This gives me a 2:1 risk ratio.

The broker have now placed 6000 euros on the market in my name. The agreement now is that, if I make a loss, I will guarantee with my “margin” of 666 euros to pay the broker my loss. I also have to pay the spread costs (the difference between the purchase price and the sale price).

**phase 3: Price movement**

The price then rises 40 pips (from 1.22097 to 1.22497). That 6,000 euros has therefore also increased in value.

First I bought $ 7325,82 for € 6000 (6000 x 1.22097). Now I get $7349,83 for € 6000 euros (6000 x 1.22497). A difference of 24 dollars (about 20 euros).

**phase 4: Finishing the trade**

As soon as the take profit is reached, the broker takes the 6000 out of the market (the order is stopped).

I am happy, because this increase of the EUR/USD was worth 18,40 euros, and will then be credited to my account. Why 18,40 euros?

40 (increase in pips) x 0,50 (value per pips) = 20,00 - 1.60 (spread costs) = 18,40 euros.

The broker is happy because I paid your spread fees, and I probably want to trade again.

Is my reasoning right? I very curious. Hope to hear from you!

Thank you,

C