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Chapter 5, Part II. Intermediate Checkpoint. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 14, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Here is the last task for today…

    Task #4

    Assume that tomorrow will be the FOMC meeting and you anticipate the Fed Fund rate increasing more than is expected by the market, or that some commentaries from Chairman that will be supportive for the USD. Whatever the case, you expect the USD grow compared to other currencies. Here are the questions:

    1. What position should you take in USD/CHF pair?

    2. How much cash should you have on deposit in USD terms if the current USD/CHF ratio is 1.13 in order to trade 0.1 of standard lot with 1:20 leverage (or 5% margin that is the same)?

    3. What will the result be on your account, if the USD/CHF rate will increase by 0.01? What should it to do by the way, to behave in line with your expectations?


    Pipruit: Commander you’re becoming more harsh just before my very eyes… ​

    Commander in Pips: Come on, you can do it! This riddle has some moments that demand brain work, not just knowledge…



    Pipruit: You’ve becalmed me much with this statement, Sir...

    1. “What position should you take in USD/CHF pair?” This is the easiest question. I expect an increasing of value of USD that is a Base currency. It means that it determines the direction of ratio – USD outperforms - USD/CHF rises, USD underperforms – USD/CHF falls, hence I should buy USD/CHF.

    2. “How much cash should you have on deposit in USD terms if the current USD/CHF ratio is 1.13 in order to trade 0.1 of standard lot with 1:20 leverage (or 5% margin that is the same)?” I see a trick question here – USD is the base currency in this pair, so I do not need to know ratio to calculate the deposit in terms of base currency. All that I have to know in this case is a leverage ratio and lot size, because in any trade the amount of base currency that is involved in the transaction is equal to lot size, i.e. the number of units and does not depend on any ratio. The ratio, in turn, shows the amount of quote currency for 1 unit of base currency and it’s absolutely necessary to know, if you have asked me to calculate deposit in terms of CHF. So my answer is 0.1*100 000/20 = 500 USD. In terms of CHF – 1.13*0.1*100 000/20 = 565 CHF.

    3. “What will the result be on your account, if the USD/CHF rate will increase by 0.01? What should it to do by the way, to behave in line with your expectations?” Let me answer on the second question first. Obviously USD/CHF should show growth – we’ve talked about it in the first question already. It’s not so simple with the calculations – I will try to do them in table sheet:

    Trade consequenceUSD/CHF rateUSDCHF
    1. Place (lock) margin (deposit) 500 USD 500 locked
    2. BUY 0.1 lot USD/CHF (Buy 10 000 USD for 11 300 CHF). 1.13+10 000-11 300
    3. Rate change to 1.141.14--
    4. Close position – SELL 0.1 Lot USD/CHF (Sell 10 000 USD for 11 400 CHF)1.14- 10 000+ 11 400
    5. Returning (unlocking) margin of 500 USD 500 unlocked
    Total+0.010+ 100 CHF
    Pipruit: But, Commander, what should I do with these 100 Swiss francs? I do not need them. I need bucks…​

    Commander in Pips: Here is the trap in this task. You’ve done well. Tell me, if USD/CHF rate 1.14 at moment of closing your initial position, how many USD you will get for 100 CHF?

    Pipruit: 100CHF/1.14=$87.72​

    Commander in Pips: Fine, precisely this amount of USD will be added to your available account balance when close your trade. The point is that your FX broker will convert profit or loss into the currency that your initial deposit was using. And this will be done simultaneously and at the same rate with the position closing. It means that when you just click “Sell” USD/CHF button at 1.14 in our example, you get profit 100 CHF and broker converts that into USD, if your initial trading deposit in USD. If it was created in EUR – broker coverts it to EUR, etc. The same thing if you will get, 100 JPY profit, for example. They also will be converted in the currency of your initial deposit. Later I’ll give you another example.

    Pipruit: Cool! This is much comfortable than accumulate profits on in different amounts of different currencies.​



    Commander in Pips: Exactly. And this was done particularly for this purpose. Now, take a look at table below. This is typical information about trades that has not been closed yet, i.e. open trades. What can you tell me about it?

    [​IMG]


    Pipruit: Let’s see. I think that “Order” and “Time” are number of order and time of opening the trade, “Type” – Buy or Sell, its obvious. “Size” – is a number of lots, unfortunately I do not see, what is the lot value, but, probably 1 lot is 100 000 units of base currency, so current position is for 10 000 units. First “Price” is 1.29469 – looks like this is initial price that trader had bought at, “S/L” and “T/P” – I do not know what they are… Ok, then, second “Price” – this is current price 1.29771, because, as you’ve said, trade has not been closed yet. “Commiss”…? Oh, I think this is “Commissions” and they are equal to zero. Then “Swap” and “Profit”. Profit is obvious thing, by the way – (1.29771-1.29469)* 10 000 = $30.20, so I was right about lot size!

    “Margin” on the second row shows 25.89$. Hm… Interesting, what the leverage value is…I will calculate it, if you don’t mind - let’s, see position value is 0.1*100 000*1.29469 = $12 946.9. So leverage is $12 946.90/$25.89 = 500! That’s huge! 500:1!

    But what does swap mean? Don’t you want to tell me that this is SWAP trade, Commander? Also, take a look – total profit is different from final profit precisely at the value of the swap – $0.07.​

    Commander in Pips: This is not the SWAP trade. You’ve done well, especially with noticing that total profit is different from position profit for swap value.
     
    Nachoga, SandGrain and fran alvarez like this.
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