The most important aspect of Forex trading is having a working strategy and one of the most widely used rule is of diversification of the trading portfolio. Diversification of the trading portfolio means getting exposure to various currency pairs so that the trading result is not influenced by any single currency pair. As an example, a trader may trade ten different currency pairs at a time with the maximum loss per pair allowed of 0.5% of the global portfolio value. However in implementing this diversification strategy it is important to know various aspects of the different pairs like the pip value, overnight rate and margin for these have a great impact on the chosen strategy. The Dukascopy website has great Forex calculators that can be used for this purpose. This article looks at these forex calculators and how they can aid the trader in implementing their trading and risk management strategies.
How to get to the Forex Calculators
The Forex calculators are found in the “market info” section of the Dukascopy website . On the drop down menu that appears when you point the cursor to this section, click on the “Forex calculator” section as shown in steps in Fig 1 below.
Fig 1: Steps of going to the Forex Calculators
The first calculator that will be discussed is the Forex Calculator, which appears after completing the steps described above. According to the Dukascopy Website, “The Forex calculator offers comprehensive information on hypothetical trade. The input parameters include currency pair, contract size, account currency, leverage, commissions, spread and rollovers. Additionally, users of the calculator can compare Dukascopy rollovers with rollovers of other Forex intermediaries.”
Fig 2: Forex Calculator page
How to make use of it
Account Currency: Enter the currency in which your account is denominated.
Account Leverage: Enter the leverage being used. A choice of three is available, that is 1:100, 1:200 and 1:300.
Default lot size: A choice of millions, thousands and units. Personally I prefer units as I can adjust my strategy to the last dollar.
Rollover Policy and Islamic Account: The rollover policy depends on a traders trading activity. It is calculated as the total trading volume on all trading accounts of the client divided by the sum of the trading and overnight volume over the last 30 calendar days. If the trader uses a swap free Islamic account then click on that option.
Trade Data: Enter the details of the trade, which is the Side, Instrument, Amount, Open Date and Open Price. The pip Amount, Current date and Current price will be automatically entered.
Commissions Data: Equity, Net deposit and Traded Volume are used to calculate the commission levels applicable to the trading account.
The following results are a based on a USD account, which attracts a commission of USD 35 per 1 million dollars traded.
- Buying 1 lot (100,000) of EURUSD
- Selling 1 lot (100,000) of EURUSD
- Buying 1 lot (100,000) of USDJPY
- Selling 1 lot (100,000) of USDJPY
The above results in tables 1 to 4 show that the differences in margin requirement between different currency pairs. This is important so that a trader does not commit more funds to a trade than he would have liked. The rollover is also important for traders engaging in carry trades. Selling EURUSD and buying USDJPY will ensure that there is a positive swap overnight and traders can use this as part of their trading strategy. The importance of this calculator is to understand the dynamics of one’s trading position.
The overnight calculator shows the swap for leaving a position open overnight in accordance with the rollover policy. The overnight calculator is useful for traders who engage in the carry trade strategy. The carry trade is a strategy in which traders borrow a currency that has a low interest rate and use the funds to buy a different currency that is paying a higher interest rate with the goal of earning not only the interest rate differential between the two currencies, but to also look for the currency they purchased to appreciate. The success of the strategy also depends on the bid ask spread of the currency pair. Fig 3: Overnight calculator page
The swap rates in Fig 7 above are based on an USD account with a premium rollover policy. The trading volume is 1 lot. As can be seen, shorting the EURTRY, EURUSD and GBPAUD will result in a positive swap being credited to the account. The swap can also offset the commission payable on a trade thereby reducing the overall cost of trading.
Trading on the forex market involves the use of margin accounts or leverage, enabling a client to execute trades larger than the deposit. This amplifies the profits and losses on the account.
Fig 4: Margin calculator page
This is a calculator that is useful in identifying the currency pairs to trade in will not exhaust the margin available to the account. For example, trading 1 lot of EUR/TRY will require USD11,789 while trading 1 lot of GBPUSD will require USD448 and 1 lot of NZDCHF will require USD234. The lower the funds required to trade the more currency pairs can be added to the trading portfolio thereby increasing diversification.
Having the right strategy in Forex trading is one of the keys to successful trading and having the right information will be of paramount importance. The Forex calculators will go a long way in providing information that will be useful in making trading decisions. The calculators can also be used to check the competitiveness of the rates against fellow market participants.