This week we have a very good article from our trader Diana about the current global economic situation & risk calculation on Dax. Enjoy this reading with very valuable insight.
March 2020 On global economic stimuli due to Coronarivus
Significant things are happening worldwide, for example, that the FED has issued stimuli, on the one hand, to lower interest rates to 0% and massive purchases of financial assets worth $ 700,000 million as measures in the face of the crisis that the Coronavirus seems to be unleashing. It's from a movie. Surreal.
The reality is that we are living.
The Federal Reserve may increase its measures in the purchase of Treasury Bonds worth $ 500 billion and in mortgage-backed assets by at least $ 200 billion, all in coordinated action FED, Bando de Japan, BCE, Swiss National Bank, Bank of Canada, Bank of England, Swiss National Bank (and I don't know if I forget any).To trade seriously DO I NEED TO UNDERSTAND THE MARKET?
How many of us have lived the experience of pretending to understand the reactions of markets or others, proving to be impossible? It means spending energy until, instead of understanding, we begin to respect and tolerate.
Just when we stop wanting to understand means that the end of a stage is coming.
HOW MUCH DOES IT COST TO INVEST IN DAX MARKET?
Everything is relative. As an example, I write about CFD (contract for difference) in what represents the most relevant companies in the German economy.
1.00 lot Dax "Movement of 1 Pip" = 1$
The SL will have to be calculated at the cost ratio 1PIP $ 1, in the same way, take into account for the TP, the same valuation.
This would be eg. I want to risk ONLY 1% per operation in trade, well … and eg. the base we have is $ 10,000 find 1% $100 is what we offer to the market.
The system, regardless of the RISK / PROFIT ratio, which would give long and long to write, we classify it as positive in the long term.
Then we offer as mentioned before the amount of -100 for eg. receiving from the market +500, let's say a somewhat moderate 1: 5 ratio that is fine.
The cost of 1 PIP to move the market, would mean $ 1 of positive or negative fluctuation (whatever the market wants) but we establish when and how we want to offer to the market.
As the calculation indicates that based on $ 10,000, risking -1% in the trade means -100 $ and each PIP costs -1 $, it would be an SL of -100 PIPS that we offer in this example case.
The same happens with the TP, synthesis: based on a ratio of 1: 5 they are +500 PIPS AT $ 1 EL PIPITO + 500 $ BECAUSE EACH PIP COSTS $ 1 it would be a TP +500 PIPS
Well, according to the trading plan, we enter the market according to the model, we put SL at – 100 PIPS -100 $ and TP at + 500 PIPS + 500 $
IMPORTANCE OF THE BALANCE SHEET RESULT
Spot or streak profit/loss is not as important as the sum of thousands of executions that make up the long term.
I mean when we apply a serious proven model, if we lose or win multiple times it's only influential. And many executions run from system determination until it actually remains stable.
So everything is relative. There may be different systems with R / W 1: 5 each offering different results in the short or long term.
I hope I have contributed to someone.
Example between simple interest and compound:
Simple Interest Application
Base 5,000 + 20% (+ -1,000 $) = 6,000+
5,000 + 20% (+ -1,000 $) = 7,000+
5,000 + 20% (+ -1,000 $) = 8,000+
5,000 + 20% (+ -1,000 $) = 9,000+
5,000 + 20% (+ -1,000 $) = 10,000+
5,000 + 20% (+ -1,000 $) = 11,000+
5,000 + 20% (+ -1,000 $) = 12,000+
5,000 + 20% (+ -1,000 $) = 13,000+
5,000 + 20% (+ -1,000 $) = 14,000+
5,000 + 20% (+ -1,000 $) = 15,000+
5,000 + 20% (+ -1,000 $) \= 16,000+
This is an example of a table based on a base of 5,000 applied calculation of 20% per month during the 11 month period.
Compound Interest Application
Base 5,000 + 20% 6,000
6,000 + 20% 7,200
7,200 + 20% 8,640
8,640 + 20% 10,368
10,368 + 20% 12,441
12,441 + 20% 14,929
14,929 + 20% 17,914
17,914 + 20% 21,496
21,496 + 20% 25,795
25,795 + 20% 30,954
30,954 + 20% 37,144
Starting with a basis of 5,000 at a rate of + 20% return applied month compound interest during the period of 11 months we would obtain a total of +37,144.