Ok, so I’m not really a newbie perse. I still consider myself a novice, but I’ve been trading consistantly for a few months, dabbling here and there for years, Im almost 20, started when i was 15, but just really got into it recently. My father and I talk finances almost nonstop and we are both knowledgeable in the stock market, so one would expect explaining the Forex market to be easy, wrong.
Long story short, I’ve been trying to explain to him the whole deal with margin and why its not dangerous on a debt term but was having trouble so i decided to sit down and do the math so I’d have some figures to show him and prove that the margin call is there to protect you, not “rape” you and prevents your account from going negative with the exception of weekend jumps, of course.
Anyway, so heres where I found an issue. I have always comprehended the market as this:
Go long EUR/USD 100,000 units
Take out a 100,000 USD loan at .8%(100:1 margin requiring $1000)
Swap to EUR at conversion rate of 1.5000 for 66,666.67 Euros and earn .85%
Then essentially each pipette is a dollar making a pip 10. The problem is, when I do the math, on a 10,000USD account, a drop of EUR/USD to 1.4100, or 900 pips, is a lose of 9000USD.
However, converting the 66,666.67Euros to USD at 1.4100 is 96,000USD, or a lose of 6000USD.
Anyway, sorry for the text wall, but I was wondering if anyone could clear this up for me. I must be missing something. As my father always says, if you don’t understand something, stay away from it.