Why does a trader need to know about the break-even point?
How to multiply your profits and reach a higher level of income by Forex trading? This question is of interest to many novice traders who are trying to predict the expected dividends from transactions with currency. Trading in one way or another is always associated with certain risks, therefore, an objective understanding of your own financial potential is important to form realistic inquiries about your future in Forex trading.
Not all users have basic knowledge of accounting, and our today’s review will help you to understand in detail such a term as “break-even point”, and we will also teach you how to calculate the break-even point in Forex. This information will be useful to those who want not only to protect their deposit from hypothetical losses, but also to feel more free and confident when trading Forex as a professional with extensive experience.
After having read this article, you can perform some mathematical actions and, in fact, become your own personal accountant, because all the statistical work on calculating the loss or profitability of a trade does not have to be entrusted to anyone else. If you delve into the formula by which the break-even point is calculated in Forex, even this awareness in itself will contribute to your professional growth as a trader.
In the business world, there are frequent examples when an entrepreneur enthusiastically takes on an interesting and promising project, but the lack of a clear understanding of his prospects often prevents the most daring and ambitious aspirations from being realized. This comes from the inability to calculate the exit from minus to zero, that is, to the break-even point. Our experts are ready to share with you an effective methodology for calculating the break-even point in Forex, which will bring your trading to a qualitatively new level.
The concept of a break-even point in Forex
In global economic theory, the break-even point is understood as the transition from the unprofitable phase of doing business to the phase when the income received becomes equal to expenses. This concept has many uses in different markets, including trading stocks, options and futures, but in the context of Forex trading, we are talking mainly about transactions in which the trader’s investments in trading and the profits from it are equalized.
The break-even point as an economic concept is closely related not only to the technical algorithms for making a deal, but also to human psychology. Forex trading can be perceived by some categories of traders as something gambling, addictive, as a result of which it is difficult for them to discipline themselves and keep their impulsive impulses under control. Not everyone is satisfied with a zero profit on a closed position or a profit that does not exceed a couple of points. Many traders want to receive unlimited income.
A strong-willed approach to closing deals is absolutely necessary, as emotions get in the way of seeing the real picture of what is happening. In the traders’ vocabulary, there is an expression “move the stop to break-even point”, which is a reference to the skill of completing a trade in a timely manner. Such skill usually comes to a person with time and experience, when a trader already has an understanding of how the internal processes in the foreign exchange market work and how to calculate the break-even point in Forex, because this is important for successful trading.
The psychological component of the concept of break-even is remarkable in that it can demonstrate such a feature of human nature as greed. Forex has always been a market with a high level of various risks, so it is absolutely accurate to say that a career as a trader is suitable only for people with specific personality characteristics. Today you have the opportunity to honestly answer the question of whether you will be able to break-even in Forex.
The formula for calculating the break-even point in Forex
From what we said earlier, you could understand the term “break-even point”. For a deeper understanding of this concept, you need more specifics, which the formula for calculating the break-even point in Forex will give you. This formula will help to avoid mistakes in forecasting the period for which your income will be equal to losses and expenses. Sometimes traders jokingly say that inaction is the optimal breakeven strategy, and then the need for a formula will disappear.
Based on the “Total Revenue” and “Total Cost” values, the break-even point will be when the profit is zero. Of course, any trader wants not only to equalize their incomes with costs, but to reach the level of return on their Forex trading. However, this is already the next stage of professional growth, and for novice traders, the main task should be to reach the break-even point in Forex trading.
Again, Forex is a special area of business where it is important to remain realistic and sensibly assess the potential of your initial opportunities. In a universal form, the formula by which you can calculate the break-even point in Forex looks like a mathematical fraction. The numerator here is “fixed costs”, and the denominator is “margin profit”. Thus, one should divide the expenses by the total profit to find out the break-even point in Forex.
So, you performed these calculations and got a certain specific indicator. Perhaps even now you still have questions about what is meant by margin profit. Gross (or Margin) Profit is the difference between the sale and the cost. Speaking of Forex trading, this can be attributed to the difference from the actual sale of a currency at a certain price and its initial value for an open position. Having carried out such calculations, you will be able to give an impartial assessment of your prospects in Forex.
How to calculate the break-even point correctly?
It is quite expected that any trader wants to know the most accurate figures regarding the break-even point in Forex. Currency trading attracts many people precisely because it is possible to earn a really big fortune on this type of activity. However, not everyone can decide to risk their initial capital for the sake of illusory gain. As a rule, most traders need intelligible numerical parameters that will help to perform all calculations correctly and with a high degree of reliability.
Above, we mentioned such a thing as “profit margin” or “gross margin”. The accuracy and accuracy of the calculations in the break-even point formula has a lot to do with what exactly you will consider as profit. The misperception of the amount regarded as profit can lead to an erroneous result in calculating the break-even point in Forex. It should be understood that net profit should not be confused with margin profit.
But how can an error creep into such an exact formula for calculating the break-even point in Forex? The answer lies in the fact that the margin itself is not any fee or cost of a transaction. It represents the portion of your own money that has been assigned as collateral by default. For example, a brokerage firm may charge you a margin collateral for interbank Forex trading. Thus, your personal funds are a certain percentage of the position you have chosen.
It is important to keep this essential circumstance in mind when you are calculating the break-even point in Forex. Usually the amount of the deposit does not exceed 2%, and in some cases it can vary between 0.25% and 1%. Let’s say, if you have $ 2000, and the margin is the maximum 2%, then a $ 100,000 deal will become available to you. However, when using gross profit in the formula for calculating the break-even point in Forex, you need to take into account the specifics of the result obtained.
Break-even point as a psychological component of Forex trading
Summing up our today’s topic, we want to point out two possible ways of developing the situation with each open deal. In the first scenario of Forex trading, the trader has a chance to make a profit and close the deal, remaining in the black. In the second option, losses and loss are possible. Naturally, psychologically, one must be prepared for everything, but both of these scenarios touch at the break-even point. Forex trading can be compared to a lottery in which you can both win and lose.
As you know, long positions are often subject to the risk of being called unprofitable. And note that besides you, other traders are also involved in the deal, who are also subject to the influence of mood and emotions. Psychologists note: the internal state of a person at such moments fluctuates between fear, hope and even despair if the deal goes in a losing direction. How to hit the stop loss button in time and reach the break-even point in Forex?
First of all, curb your financial appetites and greed. In addition, you need to understand that under unfavorable conditions for you, reaching a break-even point is the most desirable result of a transaction, since otherwise there is a risk of losing much more money. Forex market experts say that only a cold-blooded approach to Forex trading, the absence of mental fluctuations between diametrically opposed feelings and states makes the trader’s psyche stable and resistant to possible stress.
Objectively speaking, the entry point and the moment when the deal will need to be closed forcibly in order to avoid losses may well be assigned in advance by a special automated assistant bot, then you will not have to worry about finding the best parameters on your own to reach the break-even point in Forex. And in any case, keeping your mind clear and pragmatic will make you stronger not only as a person, but also as a successful professional trader.