Let's assume we invest 10.000 USD in each trade with 1:100 leverage. Note: With 2-pip spread. Each of our trade would start with 2 pip minus, of course, but let focus now on the first pip in profit.
10.000 USD commands 10M USD with 1:100 leverage.
10M USD buys 1186,7M JPY. One pip profit is 0.1M JPY profit which is about 840 in USD.
So here is my basic 1-PIP win table:
Any currency pair where USD is the base currency will trade on 100 USD per pip.
The make the above trade, the account must minimum hold 10.000 EUR plus enough margin to cover for the minus pip moves.
In the last one month period the daily moves in pip:
JPY: 10 - 156 pips
EUR: 11 - 178 pip
CHF: 9 - 174 pips
Automatic stops by the broker
Good idea to check what happens if zero cover remains on the account? That is 1000 traded, while the remaining cover the original was 1000 gets "eaten up by the pips against us".
Different brokers might execute this trade differently. In theory, we should have exactly 1000 EUR when the broker exited this trade. Some brokers, however, will exit the trade earlier. Some might exit it later leaving only 0 on the balance.
I think I would always use "stop-loss orders" on my trades, but it is good to check the above just in case.
Money management is possible not by changning the levarge but by changing the bet size. That is trade only 1000 EUR at a time which is only 84$ change per pip. If I stop out on any trade that is in minus 12 pips, that is about 1000 EUR.
So on any trade, I risk 1000 EUR by trading only 1000 EUR, if my stop limit is 12 pips of entering the trade. That is 10 pips move in the wrong direction plus 2 pips initial spread.
If I have a trading capital of 100.000 EUR. For me the right way of trading is never to keep more than 2000 EUR on my trading account and only trade 1000 EUR at a time (keeping the other 1000 as cover for the minus pip moves.)
More on Money Management
Let's assume I am aiming for a large time period.
I put my stop on -50 pip but hoping for a profit, of course.
So -50 pip is the "risk" I take. Let say, my Forex trading capital is only 10.000 USD. And I don't want to risk more than 1% on any single trade. That is 100 USD risk, I am willing to take.
100 USD for the 50 pips risk. That is 2 USD per pip risk.
Unfortunatly, it also means that when I set up this trade, I can only profit 2 USD per pip on the plus side unless I am willing to take a higher risk.
From the above table: if I trade 10.000 USD, my risk per pip is 840 USD. That is 420 times higher than the risk I am willing to take.
So I must trade only 10.000/420 = 23.8 USD. Which will give me a risk of 2 USD per pip on the risk side, and a profit of 2 USD per pip on the plus side.
More on Money Management
This calculation demonstrates that with 10.000 EUR trading capital, the "1% risk" is not an easy target. Trading with 2 USD profits per pip takes quite some nerve and time to make a living on.
How can this be improved?
First, by not entering trades where the stop loss is 50 pips. Instead, always limiting the loss.
Second, a larger trading capital is needed to be both safe and profitable.
Third, it is good idea to use a statistically provable strategy or a "low risk/high probability" strategy for the trades. What does it mean?
If I could know that my strategy will never under any circumstances have a series of trades where there are more than 5 losses than wins. Example: a situation where trade results are "win, loss, loss, loss, win, loss, loss, loss, loss" can never happen as in this series there are more than 5 losses than wins.
So if we would know that this cannot happen - proven by backtesting or guaranteed buy the strategy we trade, we would only need to cover this 5 loose with our trading capital.
Can I find a trading strategy like that?