Forex Calculator Explained
When it comes to those types of tools it is worth noting that there is a wide range of calculators available for traders to use. They can certainly make the planning of trades much easier. Some of them potentially can even help traders to increase their earnings.
Another advantage of those tools is the fact that one does not need to download a Forex calculator app in order to benefit from them. All that traders need is access to the internet, where they can find them at brokerage or Forex news websites. Some of those sites also offer the Forex calculator download as well, so that traders, if need be, can use them in offline conditions too.
Here is the full list of most important calculators available for Forex traders:
- Forex Profit Calculator
- Currency Converter
- Forex Margin Calculator
- Pip Calculator
- Forex Volatility Calculator
- Correlation Calculator
- Forex Swap Calculator
Let us now go through each of those in more detail.
Forex Profit Calculator
One of the most popular calculators in the Forex market is the profit calculator. This shows the potential gains and losses traders can expect from a given trade. In order to utilize this tool, traders have to fill in certain details.
Firstly, they have to choose the currency of their trading account. Then traders need to specify the asset class and instrument. For example, let us suppose that the market participant is planning to open a long AUD/USD position. So in this case the chosen asset class will be Forex and the instrument will be represented by the AUD/USD currency pair.
Next traders need to specify the trade volume in lots. Here it is helpful to keep in mind that the standard lot is the equivalent of 100,000 units of currency. However, if one is still not sure about the lot size of one particular trade, he or she can use such a simple tool as the Forex lot size calculator. This can help traders to measure any amount of money in standard trading lots.
After filling this form in the profit calculator, then traders need to specify the type of trade. This means that they have to choose whether they will buy or sell the given currency pair or commodity.
After specifying the opening price, the trader also gets to choose the exchange rates at which he or she will place stop-loss and trade profit orders. Once the trader fills in all those details and presses the ‘calculate’ bottom, the computer will display results. This will show the amount of earnings if the rate reaches the take profit order. It will also display the amount of losses if the adverse market movements trigger the stop-loss order.
Therefore, the Forex profit calculator can be helpful in many ways. Firstly, it gives traders a realistic estimate of the possible financial results of the trade. Consequently, this allows the market participants to determine whether it is worthwhile for them to enter that particular trade.
Another major benefit of this Forex tool is the fact that it helps traders to a proper risk/reward ratio. Many professionals discuss the need of having this type of ratio in place at 1:2 or 1:3, in order to improve trader’s chances of earning higher payouts in Forex. Consequently, the profit calculator gives traders the opportunity to adjust their stop-loss and take profit orders in a way to reach the desirable risk/reward ratios.
The simplest Forex calculator is the currency converter. This can be handy for traders in many ways. For example, when market participants consider opening trades in currencies other than the currency of their trading account.
For example, if the market participant’s trading account is denominated in USD and one considers opening the long position with EUR/AUD, a trader can make use of a currency converter to plan the details of this trade.
The currency converter is not only helpful to traders, but it can be handy for investors as well. For example, if an investor considers investing in Foreign stocks, government bonds, or real estate, then this tool can help him or her to make necessary calculations in a short period of time. For the purpose of better visualization, let us take a look at this currency converter at the Axiory website:
So as we can see from the image above, the process of using the currency converter is quite straightforward. An individual has to select two currencies and specify the amount for the conversion. After clicking the ‘calculate’ bottom, the calculator will display the current exchange rate and the converted equivalent amount in the chosen currency.
Forex Margin Calculator
Next on our list, we have the Forex margin calculator. This helps traders to determine the amount of margin required by a brokerage company for opening a particular position. Here traders also need to specify the currency of their trading account, the asset class, instrument, and volume of trade in lots.
However, one notable difference here is that the trader here needs to choose the level of leverage used in the transaction. This is obviously a very important element of the calculation. For example, for opening a $100,000 position with 1:1 leverage, a trader needs to have at least $100,000 on the trading account. However, in the case of 1:50 leverage, the required margin is only $2,000. So after choosing all of those variables, the calculator will display the required margin amount.
For the purpose of better visualization, let us take a look at this image from Axiory website:
As we can see from this example, the currency of trading accounts is denominated in US dollars. The chosen asset class is the Forex market, with the AUD/CAD currency pair. The level of leverage used in this case is 1:50, while the volume in lots equals to 1. The displayed result shows that the current exchange rate of the AUD/CAD pair stands at $0.70787. The required margin for executing this trade is $1,415.74.
This calculator is helpful for traders because it allows them to calculate whether they can afford to open a given trade. For example, if a trader discovers that there are no sufficient funds to open one particular position, then he or she might consider reducing the size of the trade.
The margin calculator is also a very useful tool for risk management. Here traders can calculate the exact amount of funds, which will be tied down by a given trade. Therefore, with this calculator traders can more easily evaluate the level of risk they are taking with each position. This gives them the opportunity to choose different pairs or smaller sized trades if they are feeling uncomfortable with their potential risk exposure with a given trade.
Pip calculator is yet another useful tool for Forex traders. This shows the monetary value of 1 pip in a given currency pair. Similar to the previous calculators, we have discussed in this article, here traders need to fill in the details, such as the currency of the trading account, the asset class, the instrument, and the volume of trade in lots.
Then it will display the results, showing the current exchange rate between the currency of the account and the funding currency of the trade and the pip value. For the purpose of better understanding this Forex tool, let us take a look at yet another screenshot from the Axiory website:
As we can see in this image, the currency of the trading account is USD. The selected trading instrument is AUD/CAD from the ‘Forex’ category from the ‘asset class’ section. The volume of trade is just 1 lot.
The displayed results show that the current exchange rate of USD/CAD stands at $1.34241, while the pip value is $7.45. This means that for each 1 pip change the profit/loss amount in this trade will change by $7.45. For example, if a trader decides to open a long AUD/CAD position, adjusting for spreads, he or she gains 20 pips, then the total amount of potential payout for this trade will be $7.45 x 20, which equals $149.
So as we can see from this example, the pip calculator can be a handy tool for calculating the potential gains or losses for each trade. This can also help traders with choosing where to place the stop-loss or trailing stop orders in a given trade.
Forex Volatility Calculator
Some brokerage companies and Forex news websites offer Forex volatility calculators to their visitors. Here traders can choose from dozens of currency pairs as well as the price of commodities such as gold and silver. They also need to specify the time frame, for example, the number of past weeks which will be used in calculations.
After filling out those details, the calculator will display results. This will include the average weekly volatility calculated in pips as well as in percentages. Consequently, this calculator can be a very helpful tool for planning trades and setting goals.
For example, expecting a 200 pip gain from the currency pair in a week, when on average it only moves by 50 pips, is unrealistic. It goes without saying that, in general, the actual distance between the stop-loss and take profit orders has to be smaller with less volatile pairs, compared to more volatile ones.
One can even argue that this can be one of the Forex risk calculators since it measures the degree of fluctuations with each currency pair. Therefore, if a trader wants to reduce the risk exposure as much as possible, then he or she can choose to trade with those pairs with the lowest average volatility.
On the other hand, those traders with higher risk tolerance and with more ambitious goals might decide to identify more volatile currency pairs and open positions with those.
The Forex correlation calculator measures the degree of the positive or negative correlation between the different currency pairs. With most correlation calculators traders just need to choose the currency pair, the time frame, ranging from 5-minute to daily charts, and the number of periods.
The calculator will display the so-called correlation coefficient between the chosen currency pair and other currency pairs in the market. The correlation coefficient can range from -1.00 to 1.00.
The -1.00 coefficient means that two currency pairs are perfectly negatively correlated with each other and always move in opposite directions to the same degree. The case of the 1.00 coefficient represents the opposite extreme, where two currencies are perfectly positively correlated with each other and always move in the same direction. On the other hand, the 0 coefficient means that there is not any degree of correlation between the two given currency pairs whatsoever.
Here it is worth noting that the cases of perfect correlation between currencies are very rare. The correlation coefficient of currency pairs usually falls into the -0.99 to 0.99 range. However, there are exceptions to this. For example, the EUR/USD and USD/DKK pairs sometimes have an -1.00 correlation coefficient. The reason behind this is the fact the Danish Krone is pegged to the Euro for more than two decades now, so, therefore, it is not surprising that they move in the same direction.
It goes without saying that the degree of correlation is important in currency analysis. For example, the 0.10 correlation coefficient is very insignificant. When analyzing currencies are looking for at least a 0.50 correlation coefficient or higher.
Therefore, the Forex correlation calculator can be a very useful tool in many ways. This enables traders to quickly identify and avoid trading highly correlated currencies simultaneously. This is a very important step for reducing risk exposure.
Traders can also use this tool when planning for using Forex hedging strategies. With this calculator, the market participants can identify the highly negatively correlated currency pairs and open positions with those securities.
Finally, by using this tool, traders can measure the degree of correlation between the exchange rates of different currencies and commodity prices. Consequently, the market participants can identify which currencies are tied with one particular commodity. This can certainly improve the quality of analysis traders conduct, before opening any new positions.
Forex Swap Calculator
The swap calculator can be yet another useful tool for market participants, especially when it comes to those traders who are using carry trade strategies. It measures the exact amount a rollover trader receives or pays to the broker for keeping the position open overnight.
This might sound rather a complicated term, however, the basic premise behind this is quite simple. Every currency with a central bank has its own key interest rate. So when a trader borrows in a lower-yielding currency in order to buy higher-yielding currency, then for each day the trade remains open the brokerage company pays the swap to the market participant.
This is also known as the rollover. The exact amount of daily swap depends on the interest rate differential, as well as the commission rates of the brokerage company. Here it is worth noting that if a trader buys a lower-yielding currency and borrows in higher-yielding currency, then he or she has to pay daily interest to the broker, as long as the position remains open.
Therefore, the Forex swap calculator allows traders to make those necessary calculations before they open any positions. It goes without saying that this can be a very helpful tool for carry traders.
This Forex trading strategy involves borrowing in low-yielding currency to invest in higher-yielding currency and profit from the interest rate differentials. Therefore, with a swap calculator at hand, traders can calculate the amount of daily interest they will receive from their traders. This allows them to estimate the amount of monthly earnings which can be very helpful.
Here it is worth mentioning that this calculator is also very useful for long term traders as well. The fact of the matter is that those traders who keep positions open for weeks or even months, simply can not afford to ignore rollover costs. This daily interest expense might seem quite small. However, over extended periods of time, it can certainly add up to a considerable amount.
Therefore, long term traders can check the amount of swap rates for different positions. For example, if it turns out that the desired position will provide traders with some income, then they can go ahead and open this trade with confidence. However, if opening these positions incurs significant rollover expenses, then traders might choose other pairs or alternatively consider opening a swap-free account.