Internet trading. The most typical trading situations.

1. Terms and definitions.

  • Standard Lot - a standard sum of the transaction. For example, 100,000 EUR for transactions with EUR/USD;
  • Minimum Lot  - the minimum sum of the transaction. Usually, Minimum Lot = 1/10 Standard Lot;
  • Contract Size  - a sum of the transaction. Usually, Contract Size = Standard Lot;
  • Leverage -balance between deposit and credit;
  • Spread - difference between Ask (buying price) and Bid (selling price);
  • Commission - a fee charged by the broker, bank or dealing company for execution of transactions;
  • Interest Rate - interest charged by the broker to the Client's monetary funds, if applicable;
  • Pip, pips, tick  - minimum possible price change;
  • Value per tick (Vpt) - value of 1 pip. Shows how much the client earns or loses, when price changes by one pip in USD. Usually, vpt = 10 USD for Standard Lot and 1 USD for 1/10 Lot;
  • Balance - a sum at the Client's account upon completion of transactions;
  • Minimum Balance - the minimum balance required for transaction. For example, for transaction with 1 Standard Lot for USD/JPY with Credit = 800 USD and Leverage 1:100, minimum 200 USD are required. For transaction with 1/10 Standard Lot for USD/JPY, 20 USD are required;
  • Margin  - amount of deposit, covering risk of loss from conducted transactions;
  • Stop out - the minimum margin level, at which the broker forcibly closes the Client's transaction. If equity reaches this level, some or all open positions are usually closed by the broker. Usually it is 20-30% of the margin;
  • Floating loss/profit - momentary representation of profit/loss with an open positions;
  • Equity - quantity of money to which the balance will be equal, if all transactions are closed at a particular moment;
  • Free Margin - spare money, which can be used for opening additional transactions;
  • Credit - a credit, allocated by the broker to the Client for opening positions with an insufficient margin. Usually it is 70-80% of the margin. The credit may be expressed in USD, e.g., 800 USD;
  • Swap, Storage, Overnight - cost of the credit for leverage use, when a transaction is postponed for the next day;
  • Stop loss - an order to the broker to close a transaction with the loss, not exceeding a specified value;
  • Take profit - an order to the broker to close a transaction, when specified profit is gained;

2. Conclusion of transactions.

Conclusion of a transaction consists of several stages: making a decision on conclusion of a transaction, obtaining of quotation, conclusion of the transaction and issuance of Stop Loss and Take Profit orders, if necessary.

When requesting prices for opening of a transaction, it is required to indicate a financial instrument and number of lots.

Upon receipt of quotation, Buy or Sell commands should be issued. Sometimes, if price changes quickly, e.g. after publication of important economic data, the broker may refuse the client to open a position at the current price and offer another price. The Client may agree with this price of reject it and ask for another. Such a procedure is called 'Requote'.

If the Client's margin is insufficient, the broker may refuse the Client to execute the transaction. In this case, the Client should reduce the number of lots, close some positions or choose a trading instrument, which requires less security.

Let us review some situations, which can occur during conclusion of transaction. For the sake of simplification, we will use the following data for calculation:

  • Spread = 5 pips;
  • Instrument = EUR/USD;
  • Standard Lot = 100’000 EUR/USD;
  • Minimum Lot = 1/10 Lot;
  • Commission = 10 USD;
  • Leverage = 1:100;
  • Stop out = 20 %;
  • Credit = 800 USD;
  • Balance = 3000 USD;
  • Interest Rate = 0%;

3. Opening of a position.

An open position is the situation, when the trader can derive profits or incur losses from change of currency rates.

Prior to opening of a transaction, the trading terminal shows the basic indicators of the account:

  • Balance: 3000.00$;
  • Margin: 0$;
  • Floating loss/profit: 0$;
  • Equity: 3000.00$;
  • Free margin: 3000$;


3.1. Opening of a position (1 lot).

Upon inquiry of quotation for the currency pair EURUSD, the broker provides two prices:

  • Bid = 1.2601;
  • Ask = 1.2606;

In this case, spread is 5 pips. Cost of 1 pip for the currency pair EURUSD is 10$ (vpt = 10$).

We decided to conclude the Buy transaction. Hence, we buy EUR (sell USD) at the price of Ask = 1.2606. The trading terminal will change as follows:

  • Balance: 3000.00$;
  • Margin: 1261 $;
  • Floating loss/profit: - 60$ = (- 50$ - 10$);
  • Equity: 2940.00$ =(3000$ - 60$);
  • Free margin: 1679$ =(2940$ - 1261$);

At the moment of transaction opening, Spread (5 pips) and Commission ($10) are automatically deducted, so the loss of $60 will occur immediately. This is because if we want to close the position immediately, we will have to conclude a transaction, opposite to the open one, i.e. to sell EUR at the price of Bid = 1.2601. The transaction will be profitable, if EUR rises for more than 5 pips, i.e. when it costs 1.2611;

With Free margin = 1679$, the broker will permit opening of only on more transaction for this currency pair, since this sum is higher than the margin (1689$ > 1261$).

3.2. Opening of a position (2 lots).

When opening a transaction with two lots, the following changes will take place on the trading terminal:

  • Balance: 3000.00$;
  • Margin: 2522$ = (1261$*2);
  • Floating loss/profit: - 120$ = (- 50$*2 - 10$*2);
  • Equity: 2880.00$ = (3000$ - 120$);
  • Free margin: 358$ = (2880$ - 2522$);

With Free margin = 358$, the broker will not allow opening of an additional position with the whole lot, since this sum is lower than the value = (Margin - Credit) (358$ < 461$), but may permit opening of an additional position with a fractional lot, e.g. 0.5 lot.


4. Calculation of profits or losses.

If a commodity is purchased t one price and sold at another, profit or loss will be equal to difference between the selling price and buying price, multiplied by the sum of transaction.

Generally, the formula for calculation of Floating loss/profit is as follows:

Floating loss/profit = N*Contract Size*(Sell - Buy) - N*Commission - N*Swap*D + IR;

  • N - number of lots;
  • Sell - selling price of the base currency;
  • Buy - buying price of the base currency;
  • D - number of day, within which the position was closed;
  • IR - interest charged by the broker to monetary funds of the Client;
     

Note.

  1. The result of calculations according to this formula, when trading at Forex market, is expressed in the quoted currency (in the second-place currency). For example, for EUR/USD - in USD, for USD/CHF - in CHF;
  2. According to the formula, sum of transaction should be expressed in the base currency, i.e. the sum of transaction will be calculated in the first currency. For example, for EUR/USD - in EUR, for USD/CHF - in USD;
  3. If the operation has brought some profit, calculations should show a positive result, if losses - a negative result;
  4. All calculations are made by Rate Streamer automatically. 

4.1 Profitable transaction (1 lot).

Let us assume that after conclusion of a transaction (3.1) price started growing and currently Bid = 1.2686. In this case we are interested only the Bid price, since the current position will be closed, when we sell EUR (buy USD).

The following changes will take place on the terminal:

  • Balance: 3000.00$;
  • Margin: 1261$;
  • Floating loss/profit: 790$ = (100000EUR*(1.2686 - 1.2606) - 10$);
  • Equity: 3790.00$ = (3000$ + 790$);
  • Free margin: 2529$ = (3790$ - 1261$);


The transaction is carried out during the day, so Swap and Interest Rate are not taken into account;

4.2. Profit transaction (2 lot).

Let us assume that after conclusion of a transaction (3.2) price started growing and currently Bid = 1.2686.

The following changes will take place on the terminal:

  • Balance: 3000.00$;
  • Margin: 2522$ = (1261$*2);
  • Floating loss/profit: 1580$ = (2*100000EUR*(1.2686 - 1.2606) - 10$);
  • Equity: 4580.00$ = (3000$ + 1580$);
  • Free margin: 3319$ = (4580$ - 1261$);

4.3. Loss-making transaction (1 lot).

Let us assume that after conclusion of a transaction (3.1) price started falling and currently Bid = 1.2528.

The following changes will take place on the terminal:

  • Balance: 3000.00$;
  • Margin: 1261$;
  • Floating loss/profit: - 790$ = (100000EUR*(1.2528 - 1.2606) - 10$);
  • Equity: 2210.00$ = (3000$ - 790$);
  • Free margin: 949$ = (2210$ - 1261$);


4.4. Loss-making transaction (2 lot).

Let us assume that after conclusion of a transaction (3.2) price started falling and currently Bid = 1.2528.

The following changes will take place on the terminal:

  • Balance: 3000.00$;
  • Margin: 2522$ = (1261$*2);
  • Floating loss/profit: - 1580$ = (2*100000EUR*(1.2528 - 1.2606) - 2*10$);
  • Equity: 1420.00$ = (3000$ - 1580$);
  • Free margin: - 1102$ = (1420$ - 2522$);


Stop out for the both transaction is (200EUR*1.2528 USD/EUR)*2 = 251 USD*2 = 702 USD.

In case of unfavorable price change, when equity lowers to this value, the broker will forcibly close one or all positions.

5. Closing of a position.

Not to come to such extremes as forcible closing of positions, the trader should use the capital management strategy. The basis element of the capital management strategy is Stop-loss and Take-profit orders.

  • Stop-loss order is placed lower (higher) the price of transaction and limits losses. Thus, if the price reaches this level, the broker will close the position according to the specified price and the trader will suffer the planned loss.
  • Take-profit order is placed higher (lower) the price of transaction and fixes profit. Thus, if the price reaches this level, the broker will close the position according to the specified price and the trader will receive the planned profit.

5.1. Closing of a position by Stop-loss.

After conclusion of a transaction (2.1) price started falling and currently Bid is 1.2528. This is the level, where the Stop-loss was placed.

Prior to closing of the transaction, the following changes will take place on the terminal:

  • Balance: 3000.00$;
  • Margin: 1261$;
  • Floating loss/profit: - 790$ = (100000EUR*(1.2528 - 1.2606) - 10$);
  • Equity: 2210.00$ = (3000$ - 790$);
  • Free margin: 949$ = (2210$ - 1261$);

At this moment, the Stop-loss order will be executed, and the transaction will be closed by the broker.

  • Balance: 2210.00$;
  • Margin: 0$;
  • Floating loss/profit: 0$;
  • Equity: 2210.00$;
  • Free margin:2210$;

5.2. Closing of a position by Take-profit.

After conclusion of a transaction (2.1) price started growing and currently Bid is 1.2728. This is the level, where the Take-profit was placed.

Prior to closing of the transaction, the following changes will take place on the terminal:

  • Balance: 3000.00$;
  • Margin: 1261$;
  • Floating loss/profit: 1210$ = (100000EUR*(1.2728 - 1.2606) - 10$);
  • Equity: 4210.00$ = (3000$ + 1210$);
  • Free margin: 2949$ = (4210$ - 1261$);

At this moment, the Take-profit order will be executed, and the transaction will be closed by the broker.

  • Balance: 4210.00$;
  • Margin: 0$;
  • Floating loss/profit: 0$;
  • Equity: 4210.00$;
  • Free margin: 4210$;
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