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Chapter 5, Part IV. Spread, Lots, Leverage/margin and profit/loss – joining all... Page 7

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    ADVANCED TASK #3

    Assume that you intend to open a trading account with some broker. You have made your own analysis and come to conclusion that AUD/USD should rise in nearest future, so you intend to open a Long position on AUD/USD. The current rate on AUD/USD = 0.9893/0.9895.

    You want to invest in the long term and hold the position for about 3 months. Your broker said that you will have positive swap about $3.2 per day* for each standard lot of AUD/USD, because the interest rate on AUD much greater than on USD.

    Also you can’t exclude the possibility of some retracement on the market to the downside (i.e. against your position) but you are not sure that it definitely will take place. But you believe that it will not be greater than 160 pips against you.

    The broker is ready to provide you with 100:1 leverage. The question is:

    How many lots of AUD/USD can you open if you want to invest $10 000 as your initial trading deposit?

    *For simplicity we assume that you get swap for all 3 months in the beginning of the trade. But in general swap accumulates on daily basis, so you can’t count on future swap to help you against today’s price moving against you.
    Pipruit: Cool! A very practical task! Let’s see…Wow, I think we will need some equation, although it will be simple. In fact, we should calculate all parts in terms of standard lots.

    1. Let’s point the number of standard lots that we need to calculate as “X”.

    2. Then, the Broker’s demanded margin in terms of lots will be: (100 000*X*0.9895)/100 or 989.50*X. 0.9895 is an Ask Quote that we should use, because we intend to Buy. Also we have to use quote in margin calculation, because our trading account currency coincides with Quote currency and not with Base currency;

    3. Now let’s estimate the sum of swap – it will be $3.2/day per standard lot and I will hold position for 90 days (i.e. 3 months). Then the total swap sum will be: 3.2*90*X.

    4. The possible drawdown of my position due to retracement against me will be 160 pips: X*100 000*0.0001*160 = 1600*X

    5. Finally, we can create an equation:

    Swap value (because it positive) + initial deposit = Margin requirements + possible negative drawdown
    3.2*90*X+ 10 000 = 989.50*X+1600*X
    2589.50*X – 3.2*90*X = 10 000
    2589.50*X-288*X = 10 000
    2301.5*X=10 000
    X = 4.34


    If we can’t open fractional number of lots, so we can open just 4 lots.
    If we can, then we may open 4 standard lots + 3 mini lots+4 micro lots.

    Commander in Pips: Let’s see:

    1. Demanded margin will be: 4.34*100 000*0.9895/100 = - $4294.40

    2. Possible negative drawdown: 4.34*100 000*160*0.0001 = - $6944

    3. Initial deposit transfer: +$10 000

    4. Positive swap for 3 months: 3.2*90*4.34 = +$1249.92

    5. Balance: -4294.43-6944+10 000+1249.92 = +$11.49 (due to rounding)

    Excellent work, Son. 10 000$ indeed will be just enough to make this trade with 4.34 lots.





    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer them soon.


    Note: FPA ranks are earned in the battles against scam, not in the classroom.
     
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