Simplest Example -- Buy/Sell Numbers -- Explain?

[uzerName]

Very short and very direct overview on the numbers is what I am looking for. Totally new to all this so please keep it in English (as opposed to Esoteric).

Suppose (possible or not) I open an account with $1000 and use half that on an EUR/USD purchase. Looking at the numbers sequence below (if I gather this all correctly) I drop 60 PIPs, then swing up 160 PIPs, then drop 20 PIPs before I am able to cash out of the game. The net change from entry to exit is 80 PIPs. Looking at this example in its most basic form, does that sound like a proper summary?

EUR/USD
1.29680 < Buy in w/$500 USD from account.
1.29620 < Takes a dip by 60 PIPs.
1.29780 < Swings up 100 PIPs higher than my *entry* point.
1.29760 < Drops 20 PIPs before I can cash out here on the original purchase.

If the above sample is essentially correct (barring the possibility that drop of 60 PIPs did not kill the account), what would it take to kill that $1000 account in the example above? This is I think the most confusing *unexplained* thing about currency trades in the Forex market. Will my $1000 account survive the next scenario?:

EUR/USD
1.29680 < Buy in w/$500 USD from account.
1.29120 < Takes a dip by 560 PIPs.
1.29780 < Swings up 100 PIPs higher than my *entry* point.
1.29760 < Drops 20 PIPs before I can cash out here on the original purchase.

Does that mean we cut into the $500 balance in my account when we dropped 560 PIPS because 560 is 60 greater than 500 and we needed an extra $60 to stay in the game? If so then does this next scenario kill my original purchase and wipe out my account?:

EUR/USD
1.29680 < Buy in w/$500 USD from account.
1.28620 < Takes a dip by 1060 PIPs.
1.29780 < Swings up 100 PIPs higher than my *entry* point.
1.29760 < Drops 20 PIPs before I can cash out here on the original purchase.

If someone can help clarify, confirm and/or explain how these numbers relate I think this would be a great starting point for any newcomer like myself. Thanks in advance for any assistance you can provide.

 

[Enivid]

I would need the following information to answer your question:
1. What is "use half that on an EUR/USD purchase"/"Buy in w/$500 USD from account"? Is it a purchase of $500 worth of EUR? Or is it using $500 margin to enter whatever EUR/USD BUY position you can with that money?
2. What is your leverage?
3. What is your broker's stop-out level?

 

[uzerName]

Hi Enivid and thanks for your reply. I have read through "Forex for Dummies" since my original post here so I have a *slightly* better understanding how this works. One thing I observed is the reference I used has one extra digit so this:
EUR/USD
1.29680 < Buy in w/$500 USD from account.
1.29620 < Takes a dip by 60 PIPs.
1.29780 < Swings up 100 PIPs higher than my *entry* point.
1.29760 < Drops 20 PIPs before I can cash out here on the original purchase.

... should have looked like this:
EUR/USD
1.2968 < Buy in w/$500 USD from account.
1.2962 < Takes a dip by 6 PIPs.
1.2978 < Swings up 10 PIPs higher than my *entry* point.
1.2976 < Drops 2 PIPs before I can cash out here on the original purchase.

Leverage?? I think therein lies my big stumbling block. What account size is needed to place an order of 'X' size. How the 'leverage' affects the danger threshold where the entire account will vanish completely. This is the most baffling thing. Not to mention, really scary!!!

As I mentioned at the start, I have no experience with Forex. I could add to that to include stocks or any speculative investment at all. One thing I understand about stocks is you can buy 100 shares at $100 each, and there is zero risk if each share takes a $99.99 drop as long as it bounces back up to $100 where you began. Even better if it goes to $200 a share and you sell out 150 shares leaving the same original $10k in the market where you started. Forex??? I'm confused how my account can just plain vanish if there is a drop but never actually hits $zero. I need to figure this out because I seem to be getting indicators on my own where I can predict a 10 to 60 PIP movement with a high degree of reliability (often more). That as you can imagine makes not knowing how to enter the market that much more frustrating.

Sorry. For reasons explained above I probably posted my question here way too soon since I don't even understand half of what I said to begin with LOL

 

[Enivid]

Leverage?? I think therein lies my big stumbling block. What account size is needed to place an order of 'X' size. How the 'leverage' affects the danger threshold where the entire account will vanish completely. This is the most baffling thing. Not to mention, really scary!!!

To understand that, you need to know you current leverage with your broker and also its stop-out level. Let's consider 1:100 leverage and 50% stop-out level for your example.

If by "Buy in w/$500 USD from account" you mean spending approximately $500 margin, then, at EUR/USD = 1.2968 it will allow you to buy about 0.4 standard lot (40,000 units of euro).

6 pip dip will not do you any harm. It is just $24 loss.

You will be using (1.2968 x 40000 / 100) = $518.72 margin.

You will get stopped out when your account equity (balance - paper loss/profit) reaches 50% of required margin level. (For better understanding about margin calls and stop-outs, please refer to this article: http://www.forexnewbies.com/stop-out-level-vs-margin-call/)

50% of $518.72 is $259.36.

So, with $1,000 balance, you will be able to tolerate a paper loss of $740.64 or about 185 pips.


The calculation is a bit more difficult due to fluctuating EUR/USD, which needs to be accounted in required margin calculation, but you should get some idea here.

 

[Rambo35]

Very well explained. I hope that answers the OP's question.

 

[Fxpipper]

Nicely explained and on leverages, and margin calls, stop out levels where all your trades get closed automatically, in addition to what others have posted, check out the online info including baby pips. Simply put, higher the leverage, more the risk..

 

[Rambo35]

Simply put, higher the leverage, more the risk..

Well, I don't think leverage is the problem, risk management is.

 

[Fxpipper]

Yes and no, the experienced traders do opt for higher leverage cause they can manage their risk effectively. However, when newbies take this route with little or no MM, they end up crashing their account within a few hrs. So yes, leverage by itself is not a problem but where newbies are concerned, it is..

 

[Rambo35]

Yes and no, the experienced traders do opt for higher leverage cause they can manage their risk effectively. However, when newbies take this route with little or no MM, they end up crashing their account within a few hrs. So yes, leverage by itself is not a problem but where newbies are concerned, it is..

Alright, but that is the fault of the newbies and not the fault of leverage

 

[Fxpipper]

Yup! But try telling that to any newbie that it is their fault - you're not going to get most of them to accept that it is their fault and damn sure that they'll blame everyone from the broker to the system..LOL

 

[Rambo35]

Yup! But try telling that to any newbie that it is their fault - you're not going to get most of them to accept that it is their fault and damn sure that they'll blame everyone from the broker to the system..LOL

Yes, that is true and that applies outside of trading as well. You can tell a loser attitude by who they blame for failure.

 

[Fxpipper]

That just made me think of some of fed's statements and some of the attitudes to the news..they (fed) are doing the best under the circumstances and all that some can say about it is " damn, it is not raining gold yet.."
Yup! same attitude adjustment required both in and out of the market, true 'dat.

 

[michael77]

yes, it is not the problem of leverage. The main problem is how to use it. An experienced trader knows how to use leverage and when to use leverage to gain maximum. I would like to suggest you that an experienced trader may open by taking 1:200 leverage but you shouldn't. Don't try to be greedy at this stage. Keep it mind this is one of the main causes of losing money in Forex market.

 

[Fxpipper]

Leverage is great for trading but most newbies have trouble working out the required leverage, margin, and as a result, they often end up wiping out their account and point fingers at the broker..some things never change.
Just review all the info on leverages and what it translates into, before you go live - just a suggestion.

 

[Rambo35]

Leverage is great for trading but most newbies have trouble working out the required leverage, margin, and as a result, they often end up wiping out their account and point fingers at the broker..some things never change.
Just review all the info on leverages and what it translates into, before you go live - just a suggestion.

I agree, most fail at understanding and and one thing they are misinformed over is that leverage does not matter; risk management does. High leverage does not cause you to blow your account, absence of risk management does.

 

[Fxpipper]

Ding! Ding! Yeah, high leverage is just leverage and not something that is to be avoided unless of course you are new to trading. With a good risk management in place, any trader should be able to utilize the leverage and trade effectively..

 

[Aby123]

Yup! But try telling that to any newbie that it is their fault - you're not going to get most of them to accept that it is their fault and damn sure that they'll blame everyone from the broker to the system..LOL

As for a beginner with limited knowledge, I would definitely agree

 

[Fxpipper]

As for a beginner with limited knowledge, I would definitely agree

You're welcome and always glad to help..happy trading.