Fundamental and technical analysis does not guarantee 100% accuracy of economic forecast; therefore, capital management is an important part of the trading system of all traders. On the basis of money management, an investor plans a transaction and evaluates the most important indicators:
- Stop-loss and the amount of the potential loss on the transaction;
- Take profit and amount of potential profit;
- The ratio of potential profit and loss;
- Risk on capital per trade.
For the beginners it is difficult to make calculations because they need to work out the pip value, choose the volume of the lot, etc. It takes a lot of time and efforts if you make mathematical calculations manually and it also makes impossible for you to place several orders, as previously opened positions will not be finalized. Therefore, forex calculator is an optimal instrument to expedite the matter.
Trader’s calculator is especially valuable when the density of trades is high. The signals to open positions do not come simultaneously; there are situations when you need to place mixed orders on several currency pair. It seems to be simple: you just open the operations and then make required calculations. However, it is not true, as you should not place an order if the potential loss exceeds 2-5% of the amount or if the ratio of profit/loss is 2 to 1. Forex calculator helps to evaluate the situation.
Figure 1 shows a standard calculator. A trader needs to indicate the type of the account and the currency pair for trading. Then, he/she specifies the volume of the transaction, the leverage, the levels of stop-loss and take profit (these values are calculated in advance). The last thing to fill in is the “Balance” area. After pressing the button “Calculate” all the fields are filled with the required information, showing profit and loss in the currency of the account, percentage of profit and loss to the original amount, the amounts of spreads and swaps and the amount of the deposit). After that you can make a decision about the transaction.
If the risk to the initial capital is high, a trader can adjust the leverage or the volume of the lot, which he/she is going to sell or buy.
The ratio between profit/loss is adjusted by changing the levels of limit orders, if market situation is favourable.
Example of using forex-calculator
In practice, the use of a trader’s calculator reduces the time of planning the trade and increases efficiency of the operation. Let’s view an example: on the chart of the currency pair EUR/USD there is a pattern “head and shoulder;” on 20 February 2013, a long black candlestick has broken the line of the “neck”. For the next trading day a trader plans to sell Euro at the closing price of the previous day at the level of 1.3274. Stop loss is set above the highs of the candlestick at the level of 1.3445 of the moving average line of the Bollinger Bands indicator. The amount of the potential profit is calculated on the basis of the distance from the top of the head to the line of the neck, which equals to 386 points. Therefore, a trader will set take profit at the level of 1.2888.
We enter the information on the currency pair into a calculator, such as the amount of the lot, leverage size. In the icon on the right-hand side we enter the data on the number of pips to stop-loss and take profit and the amount of money on the account.
In this example the ratio of loss and profit is slightly above 2 to 1. A trader runs the risk of 17.1% of the account amount, which is not acceptable according to the rules of money management. It seems reasonable in this case to reduce the volume of the transaction to the level when the potential risk will not exceed 5% (ideally the risk should not exceed 2%).
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.