Someone sent us a help desk ticket asking, “I’m having a problem understanding how much I’m risking per trade because I don’t understand what the cost/quantity is.” Darrell’s response is great and educational and wanted to share with everyone. Response is below.
The risk is based on the entry to the stop price difference
What is the tick size (pip size on fx) What is the tick value (pip value on FX)
ES ticks in .25 at a value of $12.50 per tick TF ticks in .10 at a value of $10.00 per tick CL ticks in .01 at a value of $10 per tick GC tick in .10 at a value of $10 per tick EU pips in .0001 at a value of $1.00 per pip GU pips in .0001 at a value of $1.00 per pip AU pips in .0001 at a value of $1.00 per pip UJ pips in .01 at a value of about .87 per pip (on current USD to JPY conversion)
So Entry Price Minus Stop Price / Tick Size * Tick Value = The worst case loss we are setting (obviously slippage fees apply) and we do desire to move that stop up sooner rather than later ie approx 50% of entry to target etc…
Also there is margin - depending on the broker margins will vary the brokers site will list the margins for each contract
FX in the US is at 50:1 leverage on margin.
Margin is not the same as risk on futures/forex (margin is the amount they set aside so if you lose everything but margin they have a chance to close your trades without you owing them money and them owing the exchange money - though things can happen especially during news and gaps between open close etc…)
What live account size are you anticipating trading with?
Note nadex spreads though a little more complex to get down offer much lower risk of $1.00 a tick/pip and everything ticks/p[ps in a increment of 1 (ie 1, .1, .01, .001, .0001) I am covering this (Nadex Spreads) in detail on Thursday mornings webinar. This webinar shows defined risk margin versus undefined:
Also videos 3 and 4 are intros to futures and forex here: these would be good for you to review asap: http://apexinvesting.net/apex-strategy-concepts/
The simulator has variable margin settings. You would need to call the broker (ie AMP or NinjaTrader Brokerage or FXCM to ask them about how they do their margin calculations on sim).
Your CL example had you put up $1,000 in margin x 10 contracts reducing your amount by $10k on 10 contracts. But this is not risk this is margin.
The scanner is telling you the tick value and the tick size on a CL contract and on a spread contract. It is not telling you the margin on a future contract.
Available Contract Details | NinjaTrader
So margin is the amount you have to put up to do a trade to help prevent the broker from having to collect money from you to meet the trade should it go south against you. The P/L will fluctuate in addition to this. But to calculate risk should you enter and exit at worst stop price use the formula first referenced above.
I know this was a lot but i hope it helps.
Darrell