What Do All the Numbers in FOREX Mean?

Numbers. Some of us love them; some of us hate them. They excite, they scare. In this chapter, I err on the side of the hate-and-scare readers, leaving the love-and-excite souls to dig deeper with some of the resources in Appendix D. FOREX is truly a numbers game with pips, dollars, lot size, stop-loss, take-profit, leverage, margin, profit and loss, transaction costs, and more to know. Separately, they are not difficult to understand but the interrelationships involving various mathematical formulas, ratios, decimals, and fractions can be difficult to master. For example, the pip amount of your take-profit divided by the pip amount of your stop-loss is the profit-to-loss ratio.

It, in turn, is closely related to the ratio of winners to losers over a fixed number of trades. The new trader has a big plate, as is, even before considering these myriad mathematical mechanizations. All of the mechanics are important and worth knowing. But I have found over years of mentoring new traders that, like the language of FOREX, they are best learned by practice. Your broker's trading platform and tools on their website should allow you to calculate most of these values. Tip: Simply using your demo account diligently can, over time, make most of these clear to you. As you calculate the values, make an effort to see the relationship between each of the numbers, essentially reverse-engineering them. Examples and repetition is a sure path to mastery. Tip: All calculations involve two or more variables. Change only one of them at a time, up and down, and see how it affects the others. Excellent calculation tools are available on www.goforex.net, www.forexcalc.com, www.fxstreet.com, and www.oanda.com.

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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