How Using a Forex Position Calculator Can Help You Manage Risk

Using a forex position calculator is one of the most effective ways to manage the risk of a given position. The forex market experiences more than $5 trillion worth of trading volume every single day. In a rapidly changing, liquid market such as this one, managing risk will be incredibly important.

The overall objective of forex trading is obvious. Traders will attempt to hold currencies that are about to increase in relative value while avoiding those that are about to decrease in value. But even if this is obvious to many traders, there will still be many other factors that need to be considered.

Suppose that you are a forex trader, who is currently holding $10,000 USD. Following a major event—such as an announcement from the Federal Reserve—you have reason to believe that the dollar will decrease in value. You then decide to allocate some of your wealth to the Euro and some of your wealth to the Pound (GBP).

How much money do you plan on moving around? What can be considered a “safe” investment? These questions do not always have obvious answers. In order to reconcile this, many forex traders will rely on the use of a forex position calculator.

Fortunately, there are many different forex position calculators available to choose from. In this article, we will discuss the most important things to know when using a position calculator.

What is a forex position calculator?

A forex position calculator is a calculator that uses specific inputs in order to determine which forex positions you should take. The calculator does not provide any sort of insider “advice.” Rather, it asks you to manually enter inputs and—based off your own choices—it will then tell you which positions are most feasible.

Following several announcements from the Federal Reserve on June 19 (2019), the US Dollar immediately decreased in relative value. Many traders sought to move their wealth around before the value losses would materialize. By using a forex position calculator, these traders could determine exactly which moves best matched their trading profile. Without a forex calculator, making these sorts of moves is largely guesswork.

What are the components of a forex position calculator?

Most forex calculators are very straightforward. They will first ask for a series of five to six inputs and will then use these inputs to calculate an appropriate position. Some of the standard inputs you might find in a forex calculator include:

The currency that your account is currently in (such as USD)

The currency pair you plan on trading (such as EUR/USD)

The total balance of your current account (in this example, $10,000)

The risk percentage you are willing to assume (2 percent is often standard)

The stop loss orders you plan on issuing (usually measured in “pips”)

Once the calculation has been made, the forex calculator will tell you the ideal position size in “lots.” This figure will represent the amount of money you are willing to risk divided by the product of the stop loss in pips and the pip value. The amount of money you are risking will be determined by multiplying your risk tolerance by your total account balance.

As you can see, there will be a considerable amount of subjective decision-making when using the forex calculator. The forex calculator will not tell you which currencies you should move your money towards. In order to determine this, you will need to pay attention to both fundamental and technical indicators. Political developments, announcements from central banks, and changing stock markets can all affect which currencies perform the best.

How can I determine what is an appropriate level of risk?

Another subjective decision you will need to make is how much of your wealth you are currently willing to risk. Usually, traders will use their national currency as a baseline (i.e. Americans use the USD). From there, any currency that is moved away from that currency will correspond with their level of risk tolerance.

The “two percent rule” is a general rule of thumb that can be used by most traders. This rule dictates that no more than 2 percent of your position should be changed at any given time. If your account currently holds $10,000, then $200 would be an appropriate amount to risk.

In this situation, you are not really risking the entire $200. Realistically, what you are risking is having that $200 shrink to $190 by being invested in the wrong currency. If you consider yourself a risk-tolerant trader, you may want to trade above the 2 percent benchmark. Risk-avoidant traders, on the other hand, will often hover around the 1 percent level.

How can I use a forex position calculator to enhance my trading strategy?

Using a forex position calculator offers several benefits, with very little downside. Because the calculator uses your own personal inputs, you can tailor the use of the calculator according to your trading strategy. Though it cannot guarantee a position will be profitable, it does make it much easier to quantify your positions.

Generally speaking, it is a good idea to use a forex position calculator before entering into any given position. This will help you avoid committing more funds than you are currently willing to risk. Furthermore, the calculator is also ideal for experimenting with the numbers.

By experimenting with the subjective inputs—such as your level of risk tolerance or your preferred stop loss levels—you can see how changes in these inputs will affect the ideal position. Due to the presence of having multiple inputs, these relationships are not always linear. Taking the time to understand the relationship between risk tolerance and the ideal position can help you become a more effective trader.

Conclusion

Before entering into any forex positions, you should begin by using a forex position size calculator. After putting in each of the necessary inputs, the calculator will indicate which positions will be ideal for you. Even if you don’t end up using this valuable advice, it certainly helps to get some perspective.