Forex trade is a potentially lucrative yet challenging undertaking even for a knowledgeable investor. With dozens, if not hundreds, of factors to consider, the impact of the market’s fluctuations might prove difficult to foresee, not to mention coming up with a more or less precise estimate.
Still, you can’t possibly give up on the idea if you want to stay in control. You need to know what you can expect of your positions in terms of profit or loss in order to make the right decisions. Having a clear idea of your margin balance and its dynamics is key to being responsive and thus efficient in trading.
Fortunately, a forex margin calculator can reduce the time and effort, and it takes to significantly estimate your P&L. Read below to find out the answers to the following questions:
You’re most welcome to visit the comments section below this article and contribute to the discussion. Profit calculation is an important topic that unfortunately often remains to traders until later in their career, so be sure to leverage the knowledge and instruments available to your advantage.
The market of foreign currency exchange is marked by high volatility and thus risk. Overall, it sees trades making up a total of about five trillion USD daily, which inevitably leads us to the question of how profit arises from such kind of trade.
At the heart of forex trading, there’s the expectation that a certain currency will either appreciate or depreciate as opposed to another specific currency, i.e., the gap between the two values will either widen or narrow down. Traders make use of these fluctuations to build their assets. The key decision is when to buy or sell your currency so that the profit is maximized.
This might sound extremely straightforward, but in reality, the trading mechanisms employed tend to be more complex. There are more factors that contribute to your profit (or loss) as a trader, including the fees associated with your account, the leverage rate you’re using, and more. For more detail on these, be sure to check the essential terminology section below.
There are many terms associated with trading that most beginner traders would say they understand but few really do. This part of the article covers important ideas related to forex profit which you need to know to calculate your expected margin balance.
Unrealized profit refers to one that you haven’t actually raised because the position in question hasn’t been closed; a possible synonym is a potential profit, that is, one that you could make if you decided to close the trade. No matter what trading platform you choose to use, you’ll see the so-called mark-to-market P&L.
Marking to market, commonly abbreviated to MTM, refers to the process of estimating the unrealized profit or loss associated with a certain position under the market conditions currently in place. The calculations are carried out in real-time to ensure that you have useful data to inform your decision-making.
MTM is largely used to determine the price at which you can sell a long position or buy to close a short one. In the latter case, it means you’re willing to buy an asset to offset, i.e., close a position that’s part of it.
There are three main components that make up the margin balance. These are the initial margin, i.e., the percentage of the asset’s purchasing price that has to be covered by collateral or cash (presently no less than 50%), realized P&L, and unrealized P&L. The unrealized part remains prone to fluctuation exactly because it’s unrealized and dependent on the ever-changing market conditions until the moment it becomes realized as you close the respective positions.
Last but not least, leverage is an instrument that enables players to trade more than they actually own. While being empowering to many beginners, remember that it’s a function of risk, in which greater leverage is both greater gain if you’re lucky and greater loss if you’re not.
Your calculations, if you decide to do them manually, will differ for short positions as opposed to long ones. You’ll need to calculate the number of pips, the difference between the two currencies has moved. An upward change means profit on a long position and vice versa. For short positions, this rule is reversed, translating to profit in case of growth and loss in the opposite situation.
Widely used in trade-related texts, pip is essentially an acronym for price interest point. It’s an indicator that reflects the level of fluctuation within a currency pair, i.e., how the euro to USD rate has changed over a certain period. Generally, one pip equals 1 hundredth of 1%. The number of decimal points taken into account depends on the currency. For most commonly traded pairs, pricing is done up to four decimal places. For pairs including the Japanese yen, however, only two decimal prices count.
If your position is long and measures 100,000 GDP to USD, and it has gone 20 pips up, that would mean a profit of 200 USD. Conversely, a change of minus 20 pips equals 200 dollars of loss.
Leverage comes in at the stage of determining the size of your lot. As has been stated in the terminology section above, it’s the double-edged sword of forex that has the power to increase either your profit or your loss depending on which scenario unfolds.
While calculating everything for a single position should be relatively easy, it’s still human to err. Besides, it’s not that common for traders to limit their activity to a single position, which means you might need more complicated calculations. Luckily, you don’t have to estimate your P&L by hand due to software calculators.
A dedicated calculator, such as the Trader’s Calculator brought about by FBS, is a software tool developed specifically for estimating your profit or loss on your trading positions. It looks essentially like a table with cells holding the resulting values that are calculated based on your input.
Conveniently, the calculator will prompt you on which parameters to provide in order to obtain an accurate estimate. It will also control the format of your input in case you get confused, which makes it the perfect option for beginner traders.
Various calculators target different audiences and subscription plans. For instance, there are options developed specifically for cryptocurrency trading, while the most popular ones are meant for broader coverage. Here’s an example of the input fields required for the FBS calculator:
When you enter the necessary information, you’ll be able to see your expected profit or loss on the respective position.
A specialized calculator enables the trader to stay well-informed of their opportunities. This is especially valuable at the opening stage when you contemplate the viability of this or that trading position.
By manipulating the various input fields, you’ll be able to find the optimum values for each parameter. The strategy helps you optimize your profit through the spread, i.e., pips, margin, long vs. short, etc.
It’s common practice among traders to pre-calculate their trading activities using dedicated calculators. While some of the tools allow for a great degree of customization, they tend to be quite straightforward to avoid a discouragingly steep learning curve. After all, saving your time as a trader for decisions rather than calculations is the primary purpose of such calculators.
Alternatively, you might want to revisit the calculator retrospectively to analyze what you might have done differently or use it to guide your estimations for a position currently open. Most trading platforms will keep you up-to-date regarding your P&L anyway, but having more details might prove insightful.
Profit and loss calculators for forex traders are simple yet powerful tools that automate the estimation phase of trading, thus helping you tweak the position’s parameters to maximize profit. It’s a valuable way of saving your time and effort without missing great opportunities.
Are you already using a trader’s calculator? Please share your experience with it or any other thoughts that you have regarding such calculations by leaving a reply to this article. We believe that more traders should take advantage of this great technology that’s meant to make decisions more easily attainable.
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