Understanding Forex Calculations
The calculations in FOREX can be confusing, although they are not inherently difficult. Study will get you only so far, practice is the key. Use an online FOREX calculator to see how the various calculations work, then practice with a demo account
You’ll eventually need to be able to mäke these calculations instantaneously; the FOREX markets move quickly, real-time, and you’ll need to concentrate on trading, not calculations. But don’t worry if they don’t come to you right away.
Remember that a currency transaction is between two currencies, not a single currency. You may either buy or sell a currency, profiting if it goes up or down. If you buy a currency, you are said to be long and an offsetting transacüon is to sell. If you sell a currency, you are said to be short and an offsetting transacüon is to buy.
EUR/USD, for example, is the symbol for the euro-to-U.S. dollar currency pair. If you buy, you are going long the front or base currency (EUR) and effectively short the back or counter currency (USD). If you sell, you are going short the base currency (EUR) and effecIvely long the counter currency (USD).
The calculations you will want to learn are the following:
Understanding Forex Calculation
Leverage and Margin Percent
Leverage = 100 + Margn Percent .
Margin Percent = 100 + Leverage
Leverage is typically quoted as a ratio of X:l, where 1 is the margin for the position and X is the value of the position. For example, 100:1 means you control 100 ümes the margin amount. Note, one reason many traders fail is employing high leverage without a risk management strategy
Pips
A pip is typically the smallest increment that any currency pair can move in either direction, up or down. In FOREX, profits and losses are calculated in terms of pips first, dollars second. The pip is very much the basic FOREX value. Brokers offer fractional pips on the more popular pairs (e.g. EURUSD .98625, USDJPY 144.86)
Understanding Forex Calculation
Profit and Loss
Very basically, profit or loss is price change, which in turn is exit price minus entry price. If the value is positive, you made a profit; if it is negative, you lost.
Profit in Pips = Price Change x Pips
Profit USD = Price Change x Units Traded
Trading Units
You will always want to know how many units of a pair you can buy or sell. Again, almost all broker-dealer trading platforms offer this information but you should know how to calculate it on your own, also.
Units Available = 100 x Margin Available x Rate + Current Price x Margin Percent
If the USD is the base currency:
Units Available = 100 x Margin Available + Margin Percent
Standard trading units are 1,000, 10,000, 100,000, and larger
Understanding Forex Calculation
Margin
Margin Requirement = Current Price x Units Traded x Margin Percent + 100
Most retail broker-dealers now limit how much of your total account value may be committed to open trades. Margins differ for each currency and instrument (e.g. EURUSD, GBPUSD, SPX500, XAUUSD, etc).
Transaction Cost
In FOREX, cost is a function of the bid/ask spread.
No commissions:
Spread = Ask Price – Bid Price
Transaction Cost = Spread x Units Traded
Commissions:
Spread = Ask Price – Bid Price
Transaction Cost = Spread x Units Traded + commissions
Typical pip spread vary by broker and tend to be tighter for the more liquid or less volatile currencies (e.g. EURUSD) and wider for the less liquid or more volatile currencies.
Pip spreads may vary widely in fast markets, slow markets, and before und after a news announcement
All broker-dealer platforms automatically calculate these figures. Nevertheless, the complete FOREX trader will want to be able to do them on his or her own. At the minimum it will add confidence to your knowledge of the business and provide a check against any calculations made on your broker’s platform.
A few hours with a demo trading account will be an invaluable in becoming faniliar with the basic FOREX calculations. A picture jr an example is worth a thousand words. We suggest you work with only the most popular pair initially, the EUR/USD.
Try out The Amazing Trader Risk Management Algo – Free Trial HERE
Leave a reply