Mathematical formula for forex trading

Whereas in most professions you can still find a way to work around your lack of knowledge, if you fail to understand or misunderstand math and statistics in trading, it is very hard to trade profitably.

To give you a little overview, this article includes the following concepts:. Financial instruments move in Pips and an appreciation of 1 pip means that the instrument is rising 0. Some brokers quote their pips in the so called pipettes where 1 pip equals 10 pipettes.

The value of one pip is different for different currency pairs, but you can calculate it very easily:. Especially in forex, leverage plays an important role. Margin, therefore, works as a deposit that the trader hat to provide to the broker when entering a trade. When a losing trade falls below the maintenance margin, you receive a margin call and your positions are being liquidated by your broker or you are required to deposit additional funds to remain in the trade. Position sizing is straight forward with 4 easy steps and you only need the following figures to determine the size of your position correctly:.

The above 4-step calculation just serves as an explanation so that you know what you are doing rather than blindly hammering in some numbers. The expectancy of your trading system is the USD-value that each individual trade you take is worth and will yield you over the long term.

In general, the expectancy formula consists of 2 parts: Now that we know how to calculate the likelihood of winning and losing streaks and saw that it is far more likely to have 10 consecutive losing trades in a row than you thought, we can evaluate the effect of losing streaks on your account.

The problem with big losses is not only that they cost you a lot of money, but the time needed to recover from such losses. The following graph shows you the relationship in more detail. Did you know that you that your stop loss distance and your take profit distance, together with your past winrate can tell you if you should take a trade or if the specific trade would be unprofitable over the long term?

Correlation is a statistical figure that shows you to which degree two financial instruments move together. A correlation of -1 means that the two instruments are perfectly negatively correlated. If one asset rises, the other one falls at the same rate. The graph shows two instruments with a correlation of -1 — one graph is the mirror image of the other one. No correlation between two instruments exists and they move completely independently from each other. Both instruments rise and fall together with the same strength.

Correlations can increase or decrease your risk when entering trades. If you trade stocks, you can use the correlation calculator form buyupside to calculate correlations between different stocks and if you are a forex trader, the correlation calculator from mafa is all you need. Correlations change over time and can even change from a positive to a negative correlation. As you can see, both instruments have been correlated positively, but changed to a highly negative correlation in recent times and also had times when no correlation existed.

When you have a regular job you get a constant salary and the income in one month is usually independent from the one you got the month before. The graph below compares linear growth blue where you just save the same amount every single time, exponential growth red where you reinvest your profits and the red graph that simulates the trading performance risk: Randomness, Independence and Sample-Size-Thinking are three of the main statistical concepts that traders get totally wrong and are the main reasons why they completely misinterpret their trading performance.

Randomness means that the distribution between winning and losing trades is completely random over the short-term. The concept of independency means that one trade is completely independent from the one before.

If your last trade was a winner, it does not have any impact on the outcome of your next trade. The mistake traders often make is that they judge their trading system based on the outcome of just a handful of trades. If you wand to see how different trading parameters, such as risk: All I can say is wow and thank you for this post!

I bookmarked it, printed the page and even tried to save it to my tablet for later use. This is probably the most important information for any trader and you have it here all in one place! Hey Matt, thanks for your kind words. Yes, I believe math plays a very big part in becoming a profitable trader, but most trading books and websites make it too complicated.

I am trying to calculate the expectancy of my hedging trade I use on the AUD: USD to hedge my USD ETFs and Equities. I get an Expectancy of 0. I trade 1 contract of the AUD: USD Dec at the moment. What does this number mean? I reckon it would be sensible to omit this trade from calculations. If so, the average winning trade falls to 3. Your email address will not be published. Trading Resources Tradeciety Academy About us Contact Webmasters. Tradeciety — Trading tips, technical analysis, free trading tools Forex Trading Blog And Trading Academy.

Trading Blog Technical Analysis Market Analysis Indicators Price Action Psychology Beginners Risk Management Statistics Tips Premium Courses Member Login My Courses Member Forum Become A Member. Word Of Caution Growth Of Capital Why Traders Screw Up: Randomness, Independency And Sample-Size-Thinking Randomness Independence Sample-Size-Thinking Conclusion: The Math Guide For Traders Is All You Will Ever Need.

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Privacy Policy I accept. Back to the overview. Managing your risk with advanced position sizing.