Most of the time when people talk about Forex, they are talking about “spot” Forex, or trading based on the current price. The derivatives of this are the forwards and futures contracts. Just like in the stock market, shares of stocks are the underlying asset that options are derived from, the forwards and futures market operates similarly, and instead of trading current price, a future price is speculated on with an expiration date.
Basically, you purchase a contract to buy X-currency at X-price and you can sell at any time before the expiration date, as the price of the contract varies because of time and the underlying asset current price; however, unlike spot and stock purchases, and similar to options, you cannot hold on to these contracts indefinitely but your loss is pegged to the price of the contract which, is cheaper than actually holding the same amount of shares or units in Forex. Speculators take part in contracts, too, but these are mainly used for hedging.
We are going to focus on spot Forex because that is what I trad?e and that is what I have the most experience with. Currencies are traded in pairs and vary depending on many different factors, such as, interest rates, economic strength, tourism, etc. When buying one currency, you are simultaneously selling the other. EUR/USD is around $1.2114 on 12/11/2020, which means it costs $1.21 USD to purchase 1 Euro. Currencies are traded in lots. 1 standard lot is 100,000 units, a mini lot is 10,000, micro is 1,000, and nano is 100. Adding this large trading size with leverage illustrates how money is made on ten-thousandth of a cent which, is called a pip (.0001). The digit after that is referred to as a pippette. This is to make calculating easier and is also described as 1 basis point, being 1/100th of 1%. Pip stands for “percentage in point” or “price interest point”. Japanese, or Yen pairs, trade on one-hundredth of a cent, or 0.01 as a pip.
I am frequently asked how money can be made if, say, only 50 pips move in a normal day. I have a screenshot of EUR/USD below that shows a few 50 pip-ish moves, just for reference.
I will show you some fundamental math that will not necessarily be required for trading, per se, because these figures are normally calculated automatically by whichever broker you are using to trade, and can be just as easily found by doing a quick Google search. But understanding these fundamentals are very important when placing a trade, just like in math where simple concepts are building blocks to understanding more complex concepts. For simplicity, i will only use pips, and not bother with the pippetes.
EUR/USD – $1.2114 – How many US dollars does 1 Euro buy?
1/1.2114 = .82549
How much is a 1 pip move?
.0001/1.2114 = .0000825491 Euros
Remember lot sizes, or the lowest number of units you will be able to purchase, depending on your broker.
100 – 0.00825491
1,000 – 0.0825491
10,000 – 0.825491
100,000 – 8.25
Convert pips to USD – multiply by exchange rate
8.25491 * 1.2114 = 9.999997974 Let’s just say $10.
Great! So, we just need to save up $100,000 and then for every ten-thousandth of a cent move, we can make 10 bucks?
Yes and no. First, do not forget about the spread, the difference between how much one is willing to buy and how much one is willing to sell, or the bid and ask price, which puts you at a small loss, upon entering a trade and goes to your broker. For simplicity, once again, we will set any broker fees aside and given that the EUR/USD is the most traded currency, it usually has the lowest spread, like .01 per lot or something.
So, let’s figure leverage. In the US, the max leverage that can be used is 50:1. So, let’s say we got a nice tax refund and we’re going all or nothing! (never do this, btw.) We have $2,500 USD. Multiply by 50 and we are allowed to trade with 125,000 units.
1 standard lot – 1.2114 * 100,000 = 121,140/50 = $2,422.8
Nice, got around 80 bucks left for a sack of weed.
Price moves up to 1.2164. 1.2164 – 1.2114 = .0050 = 50 pips!
$10 per pip * 50 pips = $500
Wow, took us 3 months to get our tax return back and 1 day to make $500. Nice.
Now, this is only for illustrative purposes, and while it is very simple to pull off a trade like this, to consistently do this is the harder part. It involves risk management, psychology, knowledge of fundamental and technical indicators, and several other factors. Please, let me know what you think of this article and send me a message if you have any questions. \m/
Futures and options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this video or on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVERCOMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. All trades, patterns, charts, systems, etc., discussed in this video or website and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations.