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2016年6月29日 星期三

Profit/Loss, Leverage, Unit per lot in FOREX

 

ForexEACover

Hi, Guys,

My name is Googol Lien, I come from Taiwan, I am a PC / Mobile game and MT4 EA coder. Study FOREX since May 2015.

Dimitri is too important and too busy for leading us to trade with good strategy, so I think I can do something to share my little study about FOREX trading information or base knowledge. #EA_SHARP

But English is not my native language, so if there are some mistake words or sentences, please forgive me.

Because every time you buy any lot, there must be a seller, so you are buying lots from some guy you never know. When you sell, there must be a buyer to buy your lots, too. - THIS IS THE BASIC CONCEPT OF ANY TRADE.

 

WHO BUY / SELL YOUR LOTS?

Brokers are working with many different modes, Market Maker, STP, ECN....to make it easy for understanding, I won’t explain that too detail. But I believe you will find out many info. on the internet by searching the key words.

All we need to watch out is the Market Maker brokers. (or some MM brokers with FAKE ECN / STP modes.)

With MM brokers, every time you BUY an order, the SELLER IS BROKER ITSELF. That mean, your LOSS IS THEIR PROFIT, they don’t want you to win. So your spread will change like crazy, or every time you put a stop loss there, it always hit by spread enlarged suddenly. (called ‘stop loss hunting’.)

BUT, sometimes you will beat the MM brokers if you are very strong, always WIN (like Dimitri), then they will throw your orders into the real markets, they won’t be your buyer or seller to BET with you any more. Sometimes the most evil MM brokers will even BAN your account, CANCEL ALL YOUR PROFITS, DON’T ALLOW YOU TO WITHDRAW THE PROFIT and don’t let you win their money again.

With other types of brokers, your orders will be routing on some servers to match buyers or sellers automatically. (ECN will do it on more servers even co-work with other brokers.) #EA_SHARP

BTW, that’s the reason you will get “OFF QUOTES” error message when you want to create a BUY / SELL order, and the servers could not match any SELLER / BUYER who wants to SELL / BUY it on that price. It is often happened on news events. But the TRUE MARKET MAKER BROKER which works like CASINO will always ask you to re-entry on another price even not in the period of any news event, just because they DON’T want you to get a good entry price and win money from their pocket.

 


WHAT IS THE LEVERAGE FOR?

Years or decades ago, FOREX trading is tough because you must be rich enough to buy / sell lots.

For example, if Gold price is $1,300, and units per lot is 100, without any leverage, you need at least $1,300 x 100 = $130,000 for only 1 lot.

That’s insane and let the FOREX became the toy for rich man’s world only.

So they invented the LEVERAGE.

If your broker give you the leverage for ex. 500, here will be the MARGIN for 1 lot today:

$1,300 x 100 units / 500 = $260 per lot

It’s easier than before, but still a little heavy for civilians who are not rich and want to flip their account. #EA_SHARP

So brokers adjust the minimum lot form 1 to 0.1 then 0.01, and then even micro account which will ask you less units for 1 lot, such as 1 unit for 1 lot on Gold but not 100 even more.

 

HOW TO CALCULATE MARGIN?

Now you know ‘UNIT PER LOT’ and ‘LEVERAGE’, so you will be able to calculate your margin:

The same example, Gold is $1,300, leverage is 500, units per lot is 100, if you want to buy 0.1 lot, how many margin will you need?

$260 per lot x 0.1 lot = $26

It looks like possible thing for everyone now, doesn’t it?

But be careful sometimes brokers will adjust the leverage during the big events like BREXIT. Reducing down the leverage means you need more margin to keep a trade live. If you don’t have enough money in your account, then it will STOP OUT and lose your money maybe 80% less or more of your account.

Oh, I forgot to explain why do the brokers can provide LEVERAGE such wonderful thing for us who are not so rich? You can imagine that is very similar as SHORT TIME LOAN.

That means, every time you create a trade, the broker loan you the money but asking you for MARGIN, SPREAD, COMMISSION and SWAP only.

So the brokers’ fund must be huge as bank, then they can loan you money for trades and must manage your RISK by the rules such as STOP OUT your account if you may not able to pay it all. #EA_SHARP

There is one more thing about the SWAP. (for trades which over night.)

With real STP / ECN brokers, because they don’t deal your trades (NON-DEALING DESK), so generally you will get some pay with sell orders but ask you to pay swap on buy orders.

Why?

Simple rule, WHO KEEPS MONEY, WHO PAYS SWAP. (or interest like banks do)

Sell orders on Gold means you borrow some Gold from broker and sell it to some buyer temporarily. Because the buyer just keep them like loan, so buyer will pay you the swap.

BUT, the MARKET MAKER BROKERS will always ask you to PAY no matter your orders are BUY or SELL, because ALL THE TRADES ARE NOT REAL IN MARKET, AND EXIST INSIDE THE ‘CASINO’ ONLY. Your orders will lock some fund of their pocket, so you will always pay the swap to the Market Maker brokers.

 

HOW TO CALCULATE PROFIT / LOSS?

There are many blog pages and tools on the internet for you to calculate, you can reach them anytime, so I will try to simplify the rule here.

First, forget about leverage and margin when calculating profit / loss.

All about your profit / loss is how may lots you buy / sell, what the entry / exit prices, how many UNITS PER LOT, and your account currency. #EA_SHARP

For example just continued previous one, but new setting is your account currency is USD.

  1. Buy 1 lot entry price at $1,300. ( 1300.00 ) on Gold
  2. Close trade at $1301.23 ( 1301.23 )
  3. Profit is:

( 1301.23 - 1300.00 ) x 1 lot x 100 units per lot = 1.23 x 1 x 100 = $123 USD

So if you do not buy a whole 1 lot, for ex. 0.2 lot, then just multiple it with the number of 1 lot’s profit / loss:

0.2 lot x $123 = $24.6 USD

There will be one more step if your account currency is not USD such as EUR, then you will need to “forex” it from USD to EUR at the time you close the trade again.

For ex. with 1 lot, and the EURUSD was 1.10000 when you closed the trade, then the profit will be:

$123 / 1.10000 = €111.82 EUR

Done!

That means, Broker buy the EUR with your USD profit and save it into your EUR account in real time.

 

WHAT ARE POINT AND PIP?

I want to end this article with this subtitle.

Newbies and even some EA designers will be confused by the difference between ‘POINT’ and ‘PIP’. Because they are different or the same depended on brokers.

We can try to figure out it using the currency pair EURUSD for ex.

With the same price, some broker will show you 4 digits, some other 5 digits. That will look like:

Broker1 EURUSD 1.2345 Broker2 EURUSD 1.23456

If you are talking about ‘1.2345’ i.e. 4 digits, then the ‘1 Pip’ is equal to ‘1 Point’.

If you are talking about ‘1.23456’ i.e. 5 digits, then the ‘1 Pip’ is equal to ‘ 10 Points’.

Because the minimum price movement of brokers like ‘Broker1’ is only 0.0001, so they can not give you any number less than it, all your query will get an answer: the point of EURUSD is 0.0001.

But with ‘Broker2’, your query for market info. will be another answer: the point of EURUSD is 0.00001.

I am not so sure when, why or how did they invent the ‘PIP’, but as I know, SOME MARKET MAKER BROKERS SEEM FAVORED TO USE LESS DIGITS VERSION. But I can not say a broker definitely is Market Maker CASINO if it use only 4 digits on EURUSD.

Anyway, for convenience of communication, in the most of all situations the pip is 10 times to the point. Pip is 0.0001 for EURUSD, 0.01 for USDJPY; Point is 0.00001 for EURUSD, 0.001 for USDJPY.

If you are not sure how large is the pip that some guys are talking about, just ask them. Because the result will be so different especially for discussing about trading strategy.

Thank you all for read.

 

[THE END]

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