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Trading Tables 53
TABLE 6.9 Profit Threshold
PROFIT THRESHOLD
W/L Ratio
P/L Ratio 5:1
1:2 1
1:1 1
2:1 1
3:1 1
4:1 1
5:1 1
4:1 3:1 2:1
1 1 5
1 1 1
1 1 1
1 1 1
1 1 1
1 1 1
1:1 1:2 1:3
2 2 2
5 2 2
1 5 2
1 1 5
1 1 1
1 1 1
winner/loser ratio can be. Conversely, the lower the profit/loss ratio, the higher the winner/loser ratio must be to keep you in the black.
TIP: The higher your winners-to-losers ratio is, the lower your profit-loss ratio can be to meet the Profit Threshold. Conversely, the higher your profit-loss ratio, the lower your winners-to-losers ratio can be to meet the Profit Threshold. Short-term traders—guerillas and scalpers—typically have high winners-to-losers ratios, but low profit-to-loss ratios. Long-term traders—day traders and position traders—typically have high profit-to-loss ratios, but low winners-to-losers ratios. There is more than one way to skin the FOREX cat.
An example of this: If I hit three winners out of every 10 trades (seven los-ers) and achieve a 3:1 profit-to-loss ratio of $300/$100, I lost $700 but made $900 so I am okay. Table 6.9 shows the intersections of these two ratios as Positive, Negative, or Neutral (Profit Threshold). Chapter 16, “Money Management Simplified,” discusses the profit threshold in relation to the Campaign Trading Method.
TIP: Depending on your own selected T/P-S/L (Profit-Loss Ratio) you must know the Profit Threshold Winners-to-Losers Ratio. Where does the black end, the red begin? You do not want to cross that line; if possible, not even come close to it.
The light gray areas are losing and danger-zone combinations. The dark gray area of both high profit-to-loss and high winners-to-losers is difficult to maintain for any significant number of trades. Going there typically means the trader is using high leverage, investing most of his or her margin, and trading frequently. Such behavior is not sustainable over long periods of time.
For each trade you enter you must consider three factors: Leverage, Account Traded, and Required Margin. The information in Table 6.10 is also in Tables 6.7, 6.8, and 6.9 but is presented here for ready reference.
54 GETTING STARTED
TABLE 6.10 Leverage, Lot Size, Margin
Leverage
1:1
10:1
20:1
50:1
100:1
200:1
300:1
400:1
1:1
10:1
20:1
50:1
100:1
200:1
300:1
400:1
1:1
10:1
20:1
50:1
100:1
200:1
300:1
400:1
Leverage, Lot Size, Margin
Lot Size Margin
1000 1000
1000 100
1000 50
1000 20
1000 10
1000 5
1000 3.33
1000 2.5
10000 10000
10000 1000
10000 500
10000 200
10000 100
10000 50
10000 33.33
10000 25
100000 100000
100000 10000
100000 5000
100000 2000
100000 1000
100000 500
100000 333.33
100000 250
For Futures Traders
Futures traders tend to think in dollars versus a commodity asset (silver, soybeans, pork bellies, etc.). The switch to co-relational values with ratios—one currency against another—can be a bit trying at first. The trick is to practice calculating profit and loss for fictitious trades. Again, use any of the online calculators avail-able for practice. Change each parameter in turn and observe how it alters the others as well as the outcome. It may help to think of a currency pair as a spread.
Trading Tables 55
Summary
Don’t panic! It is copasetic to learn the various numeric values, calculations, and formulas along the way. Practice on your demo account is the way to go for most new traders. The most critical at the outset are Profit-and-Loss and Profit Threshold.
Chapter 16, “Money Management Simplified,” shows how to put these many factors together into a sustainable plan of action.
But the math is not nearly as complex as it may appear at first. In fact I can reduce it all to the following cheat sheet. Tables 6.1 through 6.10 are available for download from the Getting Started section of www.goodmanworks.com.
Basic FOREX Calculations
Price Change 5 Exit Price 2 Entry Price Leverage 5 100 / Margin Percent Margin Percent 5 100 / Leverage
Profit in Pips 5 Price Change 3 Pip Factor
If the Quote Currency in a trade 5 USD, then Profit in USD 5 Price Change 3 Units Traded
If the Base Currency in a trade 5 USD, then
Profit in USD 5 Price Change 3 Units Traded/Exit Price
When the profit for non-USD cross rates is being calculated, the following applies: The conversion rate is the currency pair with the USD and the quote currency of the cross rate pair.
If the base currency of the conversion rate 5 USD, then
Profit in USD 5 Price Change 3 Units Traded/Conversion Rate If the quote currency of the conversion rate 5 USD, then
Profit in USD 5 Price Change 3 Units Traded 3 Conversion Rate
You can now calculate profit and loss during open positions.
Learning these basic calculations will endow you with confidence, some-thing you will need in substantial measure to succeed as a currency trader. But take your time; full understanding is not mission-critical at the outset. Use the Trading Tables for getting started.
Chapter
A Guide to FOREX Brokers
hile regulation has indeed increased, it remains much less robust than it is in either the securities or commodity futures industries. FOREX has no central clearinghouse, making it a substantially different space
from commodity futures or listed securities. Prospective traders need to under-stand the differences and ramifications when selecting a FOREX broker.
At last count I found more than 100 FOREX broker-dealers with online retail platforms. Although some of them are Introducing Brokers (IBs) for other companies, there remain many full Futures Clearing Merchants (FCM) brokers from which to choose.
One big improvement since the last edition: Several third-party trading platforms with a full complement of features are now offered by multiple bro-kers. Previously, moving brokers meant learning a new platform. But now, if you find a trading platform you like, you can have a wide selection of brokers to choose for your trading activities. The most popular platforms are discussed in Chapter 14, “Retail FX Platforms.”
Broker-Dealer Due Diligence
Retail brokers can be divided into market makers (dealers) and ECNs (Electronic Communications Networks). ECN is the way the true Interbank market oper-ates. ECN brokers can have from one to a dozen liquidity providers. Market
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