Foundation Trading &

Investment Programme
Lesson 2
Leverage, Margin &
all the Jargon
Presented by:
Tom Daly
Director of Education

1 Academy of Financial Trading

Risk Warning
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Advice Only - It does not take into account your personal circumstances, please do not
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Academy of Financial Trading, its employees, directors or fellow members. Futures,
Contracts for Difference (CFDs), Options, and spot currency trading have large potential
rewards, but also large potential risks. You must be aware of the risks and be willing to
accept them in order to invest in CFDs and leveraged forex markets. Don't trade with
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is likely to achieve profits or losses similar to those discussed in any material provided by
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.
 Lesson 2 Agenda

Charting Process Summary

Japanese Candlesticks Buying

Summary
Pips Selling
Course Interaction
The Spread Leverage
Q&A
Lots Margin

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Asset Class Review
A quick refresher before we get stuck in

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 Core Concepts
Let the trading begin

Now
Previously

Broad Market Overview Core Framework of

Financial Trading

Covering these topics

and terms will allow Lets crack on
us to move on to
more application
focused area as we go
forward

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Price charts Japanese Candlesticks
Japanese Candlesticks Explained
X Instrument X Time

$200 High $220 High

$180 Close $200 Open

$100 Open $120 Close

$80 Low $100 Low

Rectangle = Body
Vertical Line = Shadow/Wick
9am
CANDLESTICKS
and the information they give us

$10.50
Price of XYZ stock opens at $10.00
10am $10.30
$ 10.20 A strong start to the day sees the price
increasing to $10.20 after the first hour
$10.00
The price continues to rise to $10.50
11am
By noon, the price has retraced back to
$10.30

12pm

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2pm
CANDLESTICKS
and the information they give us

$10.50
The stock has dropped back to its opening
3pm $10.30
price

The price drops below the opening for

the first time today, $9.70
$10.00
Making its way back up
4pm $9.80
$9.70 It closes at $9.80, and thats where the
price opens the following day

5pm

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 Pips Explained
A
A Pip is the smallest tradeable
Pips Explained
price movement a market
(instrument) can make

B EURUSD at $1.1211

If it moves to $1.1212, that is a movement of one Pip

C So in EURUSD, one Pip is 0.0001

D This is 1/100th of 1%

E The decimal place may change,

depending on the market

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The Spread Explained Cost of doing Business

We want to trade 100oz of Gold @ $1,100.00

Market moves to $1,150.00 this $50.00 move has led to a profit of $5,000

What are the transaction costs?

Your broker will charge you a number of pips per trade EG: 50 pips

So, it will be 0.50 charge per trade, times the size of the trade.

100 X 0.50 = 50
$50
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The Spread Explained

Overcoming Potential Barriers -

Make the spread a small percentage of your Profit Target.

Imagine your average profit return was 100 pips and your spread is 50 pips

What is your percentage cost?

Your cost of business represents 50% of your profit target

So, your average profit return was 1000 pips, your spread is still going to be 50 pips

Now what is your percentage cost?

Your cost of doing business now represents 5% of your profit target.

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Speculating on a market to rise in value without

actually acquiring.

You buy (go long) if you think the market is

more likely to rise in value.

When trading CFDs you never actually buy anything.

You are speculating on a rise in value of the

instrument between now and a future point in
time.

Buying a Market
Going Long
Buying - Example
EURUSD
STEP 04
Your 1 EURO is then worth
$1.400

STEP 02
You buy at $1.3500

STEP 05
STEP 01 If you had bought at
$1.3500, you profit by
If you buy into the EURUSD STEP 03 $0.0500
market, you believe the If the market rises up to
Euro will strengthen versus $1.4000 you profit as the
the USD 500 pips = 5c
market has risen

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 Selling Academy of Financial Trading 15

Shorting
the Market
1
You are speculating in a
fall in value of an
instrument

2
You sell (short) a market
speculating on a fall in
price

3
You are selling without
actually acquiring
(CFDs)
Short Selling - Example Shorting the market

If you sell EURUSD, you That would mean you made

If the market fell to $1.3500
believe it would require less You sell 1 Euro at $1.4000 500 pips or US 5c in this
you would be in profit
USD to buy EUR in the future trade

16 Academy of Financial Trading

Selling - Example
EURUSD
STEP 04
A loss of 500 pips

5 Cent in this Trade

STEP 02
If the market rose to
$1.4000 and you closed
your position you would
have lost funds
STEP 05
STEP 01 Again, remember we are
speculating on price
What if you sold EURUSD STEP 03 movement.
@ $1.3500 You would have lost
$0.0500

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 In trading a Standard
1 Lot is a set trade size Lots Explained
its a set amount of
volume

2 So if trading gold , to trade a Standard Lot

(1.00 Lot) is to trade 100ozs of gold

3 A Mini Lot (0.10 of a lot) is to trade 10

Ounces of gold

4 A Micro Lot (0.01 of a lot) is to trade

1 ounce of gold

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 Lots Explained
01 Pump up the volume.

02
When using your trading platform, it will
have a volume or lot field.

To trade 1 lot, you are in effect, trading

100,000 (at the current price in dollars).

03
To trade one mini lot you enter 0.10,
You are in effect trading 10,000.

To trade one micro lot, you enter 0.01,

You are now in effect trading with 1,000.

04
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 Leverage & Margin
Leverage & Margin
Explained
A
Both are intertwined,
flipsides of the same
coin.

B A broker might offer Leverage of 1:50. This means that

they allow you to access the market at 1/50th of the
actual price.

C To allow you to have access, they will require a deposit,

this is known as Margin

D The Margin is typically a percentage figure.

In this instance it is 1/50 = 0.02 or 2%

E So the Margin required is 2% of

the trade or notional value

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 Leverage Explained..
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Since the rates of change are so small,

Say Gold is trading @ $1,100/ozs only by trading large amounts can we
justify the effort this requires huge
capital!

To trade 1 lot of Gold = 100ozs. To trade 1 lot in gold, if the broker

offered you leverage of 1:50, it means
your outlay would not be $110,000

You want to trade 1 lot @ $110,000 ( 100oz x $1,100 )

It would be 1/50 (2%) of
$110,000
This is the Capital required to place this one trade
Long or Short.

$2,200
Trading Without Leverage

01 | If you bought $5,000 worth of gold at $1,100.00/ozs How much did you make?

02 | How many ounces would that get you? $1,150 x 4.545454 = $5,000.00

03 | $5,000/$1,100/oz = 4.545454oz $5,227.27 - $5,000.00

04 | So, if gold rose to $1,150.00/oz $227.27 Profit

Trading without Leverage

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Trading With Leverage

01 | If you used leverage to gain access to Gold at a rate of 1:50 Imagine gold rose to $1,150.00/oz

02 | You could trade 100ozs with a deposit of $2,200

How much did you make?

03 | $2,200 x 50 = $110,000
$1,150/oz x 100ozs = $115,000

04 | $1,100/oz s = $110,000 $5,000 Profit

Trading with Leverage Academy of Financial Trading 23

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Leverage So, why is it

given?
Sounds good
to me but
what's in it for them?

Simply, people
would not trade without it.

So, they have to.

01 A Margin Call is where total
open losses become so great
that the broker closes all your
Margin Call Explained..
positions

02 For example, 90% or above of the required

deposit placed with your broker in order to keep
the positions open

03 At this point your broker would automatically close all

open positions which would typically result in at least
90% loss.

04 This should never be allowed to occur and wont with

professional risk management but make sure you
have professional risk mgmt.!

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 Stop-Loss Explained
A
Price at which youll exit at a loss if
the market fails to perform a
tactical line of retreat

B
Stop-Loss

The stop loss is your protective line, your first line of

defense.

C Just because you dont want to lose doesnt mean it wont

happen but you can control it

D Good traders prepare for failure by capping

losses

E
Then as losses occur, even with multiple
trades, the trader already knows what to
expect and can prepare.

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Stop Loss A
To trade without stops is to ignore the
potential for downside, thereby

Explained
increasing its potential harm

Your First Line Of Defence B To predefine ones stop is very like

being aware of cash flow with ones
own business or financial affairs

C
Your exact stop location varies per trade but will
be decided by your trading strategy in fact it
ought to be specific to each market

D
There is no one way to place stops that works
perfectly. It is dependent on your knowledge of the
market you are trading as well as the past behavior of
that market

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 Limit Order Explained
A
Similar to a stop loss, this is a
predefined exit of ones trade when a
particular price is reached for profit.
Limit Order

B Its biggest criticism it limiting ones profits

C Limiting financial loss is completely valid, but

D
Limiting gains can be criticized, only if you were
targeting fixed pip returns, then it could be useful. e.g.
Intraday Trading, a.k.a. Day-Trading

E All brokers guarantee limits, which helps

them limit your gains.

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Stop Loss & Limit Order
 Next Lesson
Lesson 3, Coming Soon.

Market Analysis begins

Live platform access and application of analysis

lets
start trading!
Make sure to join us live.

Full tutorial on how to download,

setting up charts, indicators etc..

Do your very best to attend all of the sessions

live.

If you need to catch up on any lessons, simply

visit www.AcademyFT.com and log in to the
Members Area
Academy of Financial Trading 31
Join the conversation
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If any of you have any questions about the course or material then please email all queries to:

FTP@academyft.com

t.daly@academyft.com
33 Academy of Financial Trading
Japanese Candlesticks a way to look at price over time

Pip smallest change possible in an instrument

The Spread cost of trading charged by broker

Q&A
Buying / Going Long speculating on an increase in price over time.

Selling / Shorting speculating on a decrease in price over time.

Lots standard contract sizes.

Leverage greater trading power multiplier of your deposit.

Margin how much we must put down the deposit.

Stop Loss Predefined Loss Level to set in advance.

Limit Order Predefined Take Profit Point.

Make sure to type your questions in the chat box if you were unsure about anything we covered

Academy of Financial Trading 34