Article 4 in the 6 guaranteed Forex trades in a row series
In the previous article we asked the questions (below). Very few client got all the answers right so we have given the answers below.
At this point you should be able to answer the following questions:
- If you have an account of $ 1 000 and you were considering a trade which had a 40 pip stop and each pip was worth $1 – What are the maximum number of lots you could use, ignoring the need to finance margin and spreads?
Answer: $ 1 000 divided by 40 pip stop = 25 ($1 or mini) lots
- If you have an account of $ 1 000 and you were considering a trade of 25 lots which has a 60 target and a 40 stop, what size following stop would you use to ensure you break even at worst, no matter what happens, given that you plan to add 10 lots when the transaction goes 40 pips positive (ignore spreads and margin)?
Answer: When the top up occur profitability will be $ 1 000. (40 pips x 25 lots = $1 000). We are then adding 10 lots to bring the total lots to 25 + 10 = 35 lots. So $ 1 000 will be used up by 35 lots to break-even, so the stop has to be $ 1 000 divided by 35 = 28.5 pips or 28 pips to be sure from the current price.
Test or proof: If the price goes back to + 12 pip (40 pips -28 pips) from the entry the initial 25 lots will have a 12 pips x 25 lots = + $ 300 gain and the new 10 lots will have a 10 lots x -28 pips = – $ 280 loss. This will give a small $20 buffer for the break-even result.
- Ignoring spreads and margins, assume you have an account of $ 1 000 and you had a successful trade which ran for 60 pips. You started with 25 lots and then added 10 more lots when 40 pips positive. How much is your gain in $ and as a %.
25 lots x 60 pips = $ 1 500 plus 10 lots x 20 pips = $ 200 = Total gain is $ 1700 ($1500 + $200)
This is $1700/$1000 x 100 = 170% gain in one transaction.
The point of these calculations is to illustrate that
- it is possible to earn more than a 100% return using 1 trade
- it is possible to add to your transaction on a no risk basis using a following or fixed stop
- It is possible to risk your whole account on one trade
- You can create gains bigger than 100% by having bigger targets than stops or by adding to your trades.
We will be moving on to the next article in this series. It will cover the importance of selecting the best type of trading account for your 6 in a row trades,
Watch your emails carefully.