Mastering Mathematics for Forex Trading
When the word “mathematics” enters any online discussion, thousands of ex-students shudder in horror. While math is rarely anyone's favorite subject in school, it's without a doubt the most important educational currency for forex traders. Trading is all about analytics and measurement, and those that understand statistics and metrics will find themselves at a direct and clear advantage to their non-mathematical peers. However, if you're not a mathematician, there's no need to worry.
90% of all trading calculations will work using very similar formulas. From bulk currency pricing to the gains on a trade, it all comes down to being able to measure different percentage gains, ratios and fractional costs. Simply put, if you've mastered addition, subtraction, multiplication, and division, you're wielding a mathematic knowledge that's powerful enough for success in online forex trading.
So why do so many people think that trading is beyond their mathematical abilities? It's partly up to the image of trading – ten screens lit up at once, all boasting an ultra-complex looking graph – and partly due to people's natural insecurity when it comes to metrics-based competition. Forex looks much more complicated than it really is, and with the right tools it's possible to get by with a relatively basic mathematical education.
Let's look at this one example. You're trying to calculate the gains made on a certain currency trade. It's increased in value by a whopping 10%, a very large sum in most forex markets. However, each cross-currency trade attracts a 2.5% fee, leaving you with slightly less money remaining after every currency change. Let's work this one out:
If you purchase $10,000 worth of currency before the value increase, you're paying $250 to change your money into the new currency. That leaves you with $9,750 after trading costs. From there, the currency increases in value by 10 percent, which is $975 to your investment. You're left with $10,725. From here, you've got to trade back into your own currency, so the $10,725 decreases by 2.5% value. That leaves you with $10,457, a $457 profit. Without calculating the mathematical effects of the currency charges, you could have invested in this currency thinking it would yield a flat $1000 increase in value.
While this example still leaves you with a profit, imagine what a 2% gain in value at the same trading volume and fee structure would leave you with. You'd be down in terms of income, even though you traded during an increase in value. This type of analytical ability is vitally important in forex – without it you're destined to take part in non-profitable trades without even realizing so.
If you're not a mathematician, there's no need to worry. While forex trading requires only relatively simple logical calculations, those that struggle with numbers will be okay getting by with a calculator and a spreadsheet. However, to speed up your trades and currency calculations, it's wise to invest some time in expanding your mathematical education, or invest some money into a simple automation and calculation program. Both will help you separate the potentially lucrative trades from the time wasters.