The world of trading and mathematics are closely related. In fact, they go together to give you the results you seek. That’s how it all works. Since trading is related to calculations in many ways, it forms a crucial part of trading. But many traders either ignore the mathematical part or become so overwhelmed by it. Those who ignore calculations fail. Those who are overwhelmed by them fail too. But when they understand how easy, fast, and accurate trading calculations can be, their trading becomes easier. This article helps you understand trading mathematics or crucial mathematical calculations in detail.
Here is a list of some of the most crucial values in trading. This simple guide teaches you how to calculate those values.
1. Margin
Margin is a kind of credit for trading with leverage. You are required to deposit it with your broker to open a position and to keep it open. The margin can be calculated as follows:
Margin = trade size in $ / leverage
2. Spread
Spread is defined as the difference between the ask and the bid price. You buy a currency pair at the bid price and you sell it at the ask price. The spread can be calculated as follows:
Spread = Ask Price – Bid Price
3. Position Size
The number of lots determines your position size. It is also related to the type of lot and the size of the lot you buy or sell. The position size can be calculated as follows:
Ideal position size = Account risk / Trade Risk.
4. Pip value
There might be a change in value between the two currencies you consider. The pip value is just that, and you can calculate it by using the pip calculator. It is the basic unit in the forex market. The pip value can be calculated as follows:
1 pip = (0.0001 / current exchange rate) * trade size
5. Max Withdrawal
Max Drawdown, or MDD, refers to the currency pair’s largest value of price drop when observed from the peak to the trough. The MDD value can be calculated as follows:
Maximum Drawdown = (Peak Value – Through Value) / Peak Value
6. Risk-to-Reward Ratio
To make a profit, you have to be willing to lose some amount of money. That amount of money is known as the risk-reward ratio, and may be calculated as:
Risk/Reward Ratio = (Take Profit – Entry Price) / (Entry Price – Stop Loss)
Final Words
Calculations in the forex market or any other financial market can make or break your game. To stay ahead in the competitive world of trading, you have to be aware of the values that you might need for trading. Plus, you have to understand how to calculate those values easily and effortlessly with the help of trading calculators. Your journey depends on calculations, and by making them an integral part of your trading strategy, you succeed.