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Your Forex CFD trading questions have been answered

by , 03 July 2019
Your Forex CFD trading questions have been answered
Q. "I received a trade from PickPocket Trader last week to short the rand using CFDs. Could you tell me a formula I can use to know how many CFDs I must sell, in a way that I don't lose more than 2% on my R35,000 portfolio?"

A. The CFD calculation for Forex currency pairs is a little different to the calculation you need for buying stock CFDs.

Here's a formula you can use for currency CFDs, using the trade specifics as an example from last week.

Portfolio value: R35,000
Entry price: R14.1650
Stop loss price: R14.5000

Step 1: Calculate the rands you'll risk in your portfolio.  
 
Rands risked = (Portfolio value X Percentage Risk)
                      = (R35,000 X 0.02) 
                      = R700 
 
Step 2: Calculate the pips risked in the Forex short trade position.
 
Risk in trade = (Stop loss price - Entry price) 
                      = (R14.5000 - R14.1650) 
                      = 3,350 pips 
 
Step 3: Calculate the number of CFDs to sell.
 
No. Of CFDs = (Risk in portfolio ÷ No. pips risked) X 10,000 
                      = ([R700 ÷ 3,350) X 10,000]
                      = (0.2089 X 10,000)
                      = 2,089 
 
Please note that the minimum increment of CFDs is limited to 1,000 CFDs at a time, similar to how currency lots work.
 
And so, in order to ensure you risk less than 2% of your portfolio, you'll simply round down the number to the nearest 1,000 CFDs. 
 
In this case it’s 2,000 CFDs, which you’ll sell with the USD/ZAR trade.

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Q. "Hi Timon, I understand with GT247 they have a minimum rands risked per trade of R1. However, as I also trade Forex CFDs, I'd like to know how I can find the minimum rands risked per trade for the AUD/USD (Ozzie dollar). Can you please help as I'd like to know how much money I can make or lose per pip movement?"
   
A. There are two ways you can find the rands risked per pip, when you're trading CFDs. 
 
You can either call your broker and ask them what their current minimum rands risked per pip is on any currency such as the AUD/USD. 
 
Second, you can do it yourself. To do this you'll need to go onto your trading platform that you'll be buying or selling the AUD/USD to see what the current rate is. 
 
NOTE: Each broker has a different value of each currency and so it will not help to look at the main spot price which one would normally find on Google.  
 
Next, you'll need to jot down three currency values to calculate the rands risked per trade.  
 
1. USD/ZAR (The rand) which as I write this is currently R14.14. 
 
2. AUD/ZAR (Australian dollar against the South African rand) which is at the moment R9.89 
 
3. ZAR/AUD (South African rands versus the Australian dollar) which is 0.10 AUD. 
 
Then all you need to do is to divide the ZAR/USD into the USD/ZAR like this,
= (ZAR/USD ÷ AUD/ZAR)
= (R9.89 ÷ 0.10AUD)
= 0.01
 
This means that if you were to buy 1 CFD, for every one pip the market moves against or for you, you'll lose or gain one cent.  
 
However, with Forex CFD platforms such as RandSwiss, you'll normally be restricted to buy or sell a minimum of 1,000 CFDs at a time. 
 
You'll need to consider this minimum, in order to calculate the actual rands risked per one pip movement.  
 
In this case, the minimum rands risked per pip will be: 
Minimum rands risked per pip = (Risk per pip per 1CFD X Minimum 1,000 CFDs to trade) 
                                                 = (R0.01 X 1,000 CFDs)
                                                 = R10 
 
This means if you buy 1,000 CFDs of AUD/USD and the market moves against or for you 120 pips, you'll lose or make R1,200.
 
Here's the proof:
 
Gain or loss = (Rands risked per pip X No. of pips moved)
                    = (R10 X 120 pips)
                    = R1,200
 
“Wisdom yields Wealth”
Timon Rossolimos,
Analyst, Red Hot Storm Trader
  
P.S: Got a trading question or feedback you'd like to share? Then ask here at our exclusive Facebook group with over 52,000 aspiring traders
 


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