Ok you the investor, wish to open a position this is how you would proceed. After doing your market analysis through whatever method suited you (fundamental or technical analysis) it’s time, to open the deal.
- Decide the currency pair or commodity you wish to trade, for example EUR/USD
- Decide the amount you would wish to risk in the deal, $50, apply the leverage (RISK level) 1:200 = 200*50 = $10,000 (contract value)
- Choose the direction in which you wish to trade “Long” (buy) the base currency or “SHORT” (sell) the base currency.
So EUR/USD $10,000 (Leveraged) is a $50 risk to the client $50 x 200 = 10,000 1 PIP = 0.0001 represented as a decimal. $10,000 x 0.0001 = $1.00 PIP value, so for every 1 PIP moved in the Price the trader will Gain or Lose $1.00
Immediately the position is opened the position will show – negative by the spread given by the Broker e.g. 3 PIPS. Let’s say the market price for EUR/USD is 1.3500/1.3503 we go “LONG” and “BUY” EUR in the anticipation of becoming stronger The position is now open and running. IT IS VERY IMPORTANT TO REMEMBER IF NO STOP LOSS OR TAKE PROFIT IS APPLIED TO THE DEAL THEN THE POSITION WILL REMAIN OPEN UNTIL
- YOU CLOSE THE POSITION MANUALLY
- THE POSITION REACHES A PRE DETERMINED “STOP LOSS” OR “TAKE PROFIT”
- THE ACCOUNT REACHES A MARGIN CALL AND THE POSITION IS CLOSED AUTOMATICALLY
The position moves from 1.3500 to 1.3575 a difference of 75 PIPS, we know that each PIP is worth $1.00 so at this time we have a “PROFIT” of $75, – the 3 PIPs to the Broker $72 profit. We close the position manually and take the “PROFIT” all trades rely on “ROUND TURN” of an execution i.e. The Open and Close of any given position. Let’s assume that the trade did not go into profit and the market moved against the trader. If the account had a balance more than $50 then each PIP would continue to deduct from the balance of the account until the equity remaining was not sufficient to support the position, generally at 80% Equity the trader would be instructed that he is approaching a “Margin Call” if the trader does not use a specified “Stop Loss” or,
- Refund the account
- Close some or all of the positions
Then if the market continues against him at 90/100% the positions will be closed.