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Trading Calculators: an Essential Component of a Trading Plan

We all know that a trading plan is like a blueprint for building your success as a forex trader. Just like how a blueprint is essential for completing the construction of a building with perfection, a well-defined trading plan is crucial to attain your goals as a trader. This trading plan needs to be executed well in order to get the desired trading results. Forex trading involves many simple and sometimes complex calculations. A minor mistake in calculation can lead to a great deviation in results. And we can’t afford that in any situation. That is why many brokers are providing traders a feature to use online trading calculators, so that they can execute their trading plan with more precision.

Basic Calculations Required for Trading

Conversion Rates: Conversion rates between currencies are the foundation of forex trading. The trading instruments in the forex market are international currency pairs and we make profits from the favourable fluctuations that happen in the exchange rate or value of a currency pair. Your trading account will have a base currency in which you make deposits and withdrawals. Thus calculating how much of one currency would be required to trade another is important. Online trading calculators can easily do that for you as you just need to choose the currencies and enter the amount.

Value Per Pip: The price movement in currency pairs is measured in pips which is the acronym for Price Interest Point. If you are a beginner then you might have heard forex traders saying that I made 10 pips in a trade or my target profit is 100 pips a day. This is because traders often mention the number of pips to refer to their profits. But the value per pip for each position will differ depending on the currency. Calculation of pip value is important for managing the risk per trade. Hence you will find this function in every trading calculator. The calculator will return you an accurate answer once you specify the base currency and trade size in lots for a particular position.

Position Size: The size of the position you take in your trades is crucial for perfect execution of your trading plan. So that becomes a basic yet essential function in the trading calculator. Position sizing is also a part of every trader’s risk management plan as it determines the amount of capital a trader will be risking on a particular trade. Calculating the optimal position size for each and every trade can be a tiring task when you try to do it manually as a beginner. Thus, trading calculators can be used to determine correct position size for your trades.

You Need to Specify the Following for Position Size Calculation.

  • Base currency
  • Type of position (Long or Short)
  • Entry price
  • Stop loss level
  • Trading capital balance
  • Percentage of capital you will risk for the trade

The pro tip is to not risk anything more than 2% of your trading capital in a single trade. Risking anything more than that would lead to an increased drawdown in case of a loss.

Profit/Loss

Each trade we enter will either result in profits or loss. Maximising profits and minimising losses would be the end goal of any trading plan. And a trading calculator can be used for calculating them in advance even before entering a trade. This is important in order to get the desired results. Plus you can also determine the best entry price for a trade and note down if there is any slippage happening in the actual trade which results in the trade getting executed at a different price level.

You will have to specify/enter the following values for accurate calculation of trading results.

  • Base currency
  • Type of position (Long or Short)
  • Trade size in lots
  • Opening price and closing price for the trade

It is better to calculate the results in both situations, which is the profits in case you win the trade and loss in case your prediction goes wrong. By doing this, you will be able to minimise losses in each trade.

Commission: You will be paying an amount as commission for each trade that is executed on the platform. It is basically what you pay your broker in return of their service. And many brokers will let you calculate this commission easily with their trading calculator. This is a good way of keeping yourself accountable for the cost of trading. And you can also see what you can do in order to minimise this cost. You can calculate this by simply entering the trade size in lots and account base currency in the online calculator.

Margin: The margin requirement for opening a trade needs to be calculated in advance if you are availing leverage from your broker. This is important because you won’t be able to keep a trade position open if your balance falls below the margin level in case of a loss. This will lead to a margin call and you will have to deposit funds to the account to meet the required margin levels. Hence, it is advisable to calculate the margin required for every trade in advance, so you don’t have to deal with a sudden margin call.

Swap: Swaps are either paid to the broker or paid by the broker (in case of carry trading). Swap is the interest rate difference between 2 currencies in a pair. And this will be applied in case of overnight trade positions. And you can use a trading calculator to determine the long swap and short swap for a specified number of days.

Target Price: Closing your positions at the right time is relevant to maintain the risk/reward ratio in each trade. And trading calculators can be used for calculating the same. You just need to enter the opening price, trade size, stop loss and different target prices. And you can decide upon the perfect price to exit the position as per your risk/reward ratio.

To conclude, these are the basic calculations that needed to be done to perfectly execute your trading plan. Some forex trading calculators also have functions to calculate pivot points and fibonacci retracements, in order to lend you a helping hand in technical analysis. Learning to use a trading calculator is quite easy if you dedicate some time for practice. This is essential to avoid deviations in your trading plan and executing it with perfection. This way, you can attain the desired results and accomplish your goals as a trader in the long run.