The primary goal of trading in the volatile forex market is earning profits from the favourable fluctuations in exchange rates of currencies. For this, you will have to devise and employ a solid trading strategy that can help you reach the desired profit targets. Having an efficient trading system is the first and foremost requirement for earning consistently as a forex trader. So, you must take time to evaluate your own trading system from time to time. This is important as you may want to modify or revise your strategy in case they fail to deliver the targeted returns in live trading. A tool that can help you in this task is a trade return calculator.
Today, you will get to know more about this powerful tool and how you can optimise your trading system by using a trade return calculator.
Relevance of Rate of Return in Forex Trading
Rate of return that you get by following a particular trading strategy is relevant for attaining success in the dynamic forex market. Rate of return tells you the potential profitability of a trading system for a given period of time. It would be better to assess the returns you can generate by using a strategy before risking real funds in trading. You still have a chance to make adjustments and improve your trading systems if they fail to meet your expectations in the case of expected returns.
Knowing the expected rate of return is an important aspect of planning your trades and risk management. You should not be risking a huge amount of capital until and unless your trading system is capable of generating good returns for the future. In fact, calculating the expected rate of return is also necessary for taking timely action if your strategy fails to attain the expected results in actual trading.
How to Calculate the Expected Rate of Return?
Calculating the expected rate of return can be a complicated task for an average beginner. But thankfully we have this tool called forex return calculator ro trade return calculator that simplifies the calculation process. But in order to use this tool you should be able to enter accurate data into the calculator.
You need to know the following for calculating the expected rate of return:
- Your Account Balance Before Trading – This is the amount of trading capital deposited into your account before you get into trading.
- Typical Risk Per Trade – The percentage of risk you are willing to take for a single trade for instance most traders take a 2% risk per trade.
- Risk/Reward Ratio – You need to set an optimal risk/reward ratio for managing the risk in forex trading, an example would be 1:3 risk reward ratio and in this case you would enter 3 as it is the return you expect from your trading system.
- Winning Rate – Wins and losses are part and parcel of the trading process. So, you need to assess the winning rate of your strategy which is the win/loss percentage. Suppose you win 5 trades out of 10, then your winning rate is 50%. In this case you will enter 50 as the winning rate into the trade return calculator.
Another method to calculate the expected rate of return is to enter average profits/losses per trade, winning rate and number of trades executed on a daily basis. The profits and losses per trade is mostly measured in pips as it is the unit of measurement for price fluctuations in currency pairs. If you trade on MT4 or MT5, then you can use a pip counter indicator that places all the essential information in a small window. You also need to enter the pip value based on the currency pairs you trade with. So, these are the data that you would need to know for using a trade return calculator in forex.
How to Use a Trade Return Calculator?
Using a trade return calculator is pretty easy once you know the basics of trade return in forex. You just need to find a good online forex return calculator and enter the values that we explained above. The calculator will return you the results instantly with a high level of accuracy. The primary goal of using a trade return calculator is to speed up the calculation process while minimising the chances of errors that are there when you perform these calculations manually.
Let’s use an example to understand the process better. Suppose your starting account balance is $1000, your typical risk per trade is 2%, Your risk/reward ratio is 1:3 and your trading system provides a 50% win rate in most cases. You just need to feed the data into the calculator and hit the ‘calculate’ button. The very next moment, you will get detailed results based on the number of hypothetical trades a forex return calculator takes into consideration.
The calculator we used for this example takes 100 random trades for providing the expected rate of return. Here, we got the rate of return as 893% with which the account balance will rise to 9931 after 100 trades. Some trade return calculators will even display a chart that tells you the P/L and account balance after each trade. With this, you will get a comprehensive breakdown of your trades providing more insights into your rate of return. The forecast may also contain negative values which indicate losses incurred as per your average win rate with the strategy.
But one thing that you should keep in mind while using this tool is that the expected rate of return you get with a trade return calculator is based on hypothetical trades. That means the results are based on imagined and suggested scenarios which may not be real or true when you start trading in the live markets. It does not consider the chances of loss due to market volatility or other reasons. It only considers the win rate and risk/reward ratio you stated to give you the best possible outcomes that you can get out of the strategy.
There is no doubt that a trade return calculator is an efficient trading tool, but it can’t do the job accurately especially when it comes to predicting the future of your trading system. To be sure of the good trade returns, you should also be certain about the position size. Another fact that you need to know is that the efficiency of the trading system or rate of return of your strategy may not be an indicator for success in trading. When it comes to manual trading, the knowledge and skill level of a trader does play a huge role in the trade performance. Even with automated systems, the results may vary if there are technical glitches or other issues. The trade return calculator does not consider such scenarios which is something you need to be mindful of while using this tool.
You must have heard about backtesting of strategy which is crucial for assessing the profitability of your trading system. Backtesting is also done by considering the hypothetical trades that would have taken place when you use historical price data. In case of forward testing or demo trading, you will be considering the real time market data. But none of these can confirm the future success of a strategy in the live markets. They are merely tools that you use to prepare for the actual trading process by optimising your strategy.
A trade return calculator is also not very different from these tools. It just focuses on the rate of return that you can expect from the strategy. Such tools that consider hypothetical trading results enable us to make a clearly defined trading plan with a solid risk management system to maximise profits and minimise potential losses in the future.
To sum it up, a trade return calculator is a powerful tool that can be easily used by anyone to calculate the rate of return for their trading system or strategy. They help us to trade with more clarity as we already know what kind of results we can expect from each trade that we enter. So, we can refer to it as a tool that makes the process of trading less ambiguous for a beginner in the forex market. We hope you will be able to benefit from this information and take your trading to the next level by utilising such tools.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.