Q. “Hi Timon.
Is there a step-by-step guide on how to work out the value per price move (risk value) on Gold and the Nasdaq?
I want to buy gold at $1,972 and sell it at $2,072.
With the Nasdaq I want to buy it at 15,150 and sell it at 15,850.
Do these markets have their own calculations and could you provide them?”
A. Hi, yes absolutely.
Each market has their own way to calculate the risk value per point movement.
This all depends on the exchange rate per market.
With most commodities you’ll use the US dollar, as they are mostly priced in dollars.
With the indices, you’ll use the exchange rate that is linked to the index e.g. Nasdaq – USD/ZAR, FTSE 100 – GBP/ZAR and Nikkei 225 – JPY/ZAR.
To start off let’s define it first.
What is the Risk value?
The Risk value, risk per pip or point value are all the same.
It basically tells you how much money you’d gain or lose with each one-point movement.
Let’s first work out the value per point with Gold.
Let’s say you want to go long (buy) 1 Gold CFD as you expect the price to go up $100.
Here are the specifics for the trade:
Entry: $1,972
Stop loss: $1,922
Take profit: $2,072
If you’re trading a local South African account, you’ll need to know what the exchange rate is for the USD/ZAR.
Which in this case $1 will cost you R18.37.
Now we have all the elements to work out the Risk Value per pip when trading CFDs in two steps.
Step #1: Points risked in trade
= (Entry – Stop loss)
= ($1,972 – $1,922)
= 50 points or $50
Step #2: Value per point (Risk per point) per CFD
= (1 CFD X Exchange rate (rands))
= (1 Point X R18.37)
= R18.37
With 1 CFD, each point that moves for or against you, you will gain or lose R18.37 in the trade.
And if the market moves against you 50 points ($50), then you’ll end up losing R918.50 ($50 X R18.37 per point).
And if the market goes in your favour and moves up 100 points ($100), you’ll end up gaining R1,837 ($100 X R18.37 per point).
Let’s move onto the index.
How to calculate the Risk value with Nasdaq
Let’s say you want to go long (buy) 1 Nasdaq CFD as you believe the price will go up 700 points.
Let’s look at some trade specifics:
Entry: 15,150
Stop loss: 14,800
Take profit: 15,850
If you’re trading a local South African account, make sure you know what the exchange rate is for the USD/ZAR.
Which in this case $1 will cost you R18.37 (similar to the above example).
NOTE FOR MORE INDICES:
If you were looking at the DAX (Germany) – you’d look at the EUR/ZAR.
Or if you were looking at the ASX 100 (Australia) – You’d use the AUD/ZAR etc…
If you were looking at the JSE ALSI 40 (South Africa) – You’d use the rand or ZAR/ZAR. R1/R1.
Now we have all the elements to work out the Risk Value per pip when trading CFDs.
Step #1: Points risked in trade
= (Entry – Stop loss)
= (15,150 – 14,800)
= 350 points
Step #2: Value per point (Risk per point) per CFD
= (1 CFD X Exchange rate (rands))
= (1 Point X R18.37)
= R18.37
With 1 CFD, each point that moves for or against you, you will gain or lose R18.37 in the trade.
And if the Nasdaq moves against you 350 points, then you’ll end up taking a loss of R6,429.50 (350 points X R18.37 per point).
And if the market goes in your favour and moves up 700 points, excluding costs, you’ll end up making gains of R12,859 (700 X R18.37 per point).
You now know how to calculate the risk value per point per CFD.
If you buy or sell a higher number of CFDs, you’ll need to multiply it to the loss or gain as you’ll be risking more.
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