Breakeven Point in Forex Trading: How to Calculate and Master Your Risk
Imagine you close a trade thinking you made money, only to realize you lost money once you account for all of the different costs. Does that ring a bell? This frustration happens more often than traders would like to admit and it is all rooted in one simple concept: the breakeven point.
The breakeven point isn't just another trading phenomenon to remember and learn; it's the North Star to your financial journey, revealing to you where you need to be, just to break even (or not lose money) before you can even consider to make profits. Whether you are executing your first trade or managing a million-dollar portfolio, knowing your breakeven point is what sets the successful traders apart from the losers who wonder what happened to their money.
At Tradewill.com, we have seen countless traders completely change their results simply by understanding this one core concept. When you think about breakeven, think about a lemonade stand. If it cost you $5 to make and sell a pitcher of lemonade, then you need to charge $5 just to break even, or not lose money. In forex, the calculations become a little trickier, but you can see how similar these concepts really are.
What is Breakeven Point
The breakeven point is where your trade makes or loses nothing. Pretty simple, right? This is where most traders make the easy mistake of only paying attention to the hidden costs.
For forex trading the breakeven point isn't just the entry price. The breakeven point equals your entry price plus all costs paid. The costs you'll want to include when calculating your breakeven point are the spread (the difference of the bid and ask), commissions charged by your broker, swap fees for holding overnight, and slippage during market volatility.
To illustrate this example, lets say you buy EUR/USD at 1.1000, and it has a 2-pip spread as charged by the broker. Your breakeven point will not be 1.1000, but 1.1002. You would need the pair to move 2 pips in your favour to breakeven. Let's say you are a beginner, and to illustrate a point - if you buy apples for $5 with a $2 transportation cost to get them into your store, you would not breakeven until you sell them for $7.
How to Calculate Breakeven Point
Here’s a practical example: You purchase 1 standard lot of EUR/USD at 1.1000. Your broker has a spread of 1.5 pips, $7 commission and you are holding the position overnight (-$2 swap fee). Your total cost will be around 2.2 pips so your breakeven point will be 1.1022.
For stretches, try thinking of it this way: You are selling lemonade that it costs you $3 to make, plus $1 to rent the stand, and an advertised cost of $0.50. You would need to charge at least $4.50 to breakeven.
The moral of the story is to be honest and transparent about all costs. Many traders forget about the commission and overnight fees to their particular broker, and then wonder why their "profitable" trades are losing them money.
Breakeven Point & Trading Styles
Your trading style will affect how much the breakeven point affects your final result. It is a little like a runner who runs marathons, compared with a sprinter! Both runners are fit, but the demands of each are very different!
Here’s a reality check: If you are just making breakeven profits, odds are your style of trading is incompatible with your broker’s cost structure. It is much like trying to make money selling candy one at a time if the fees for the sale are $2.
Breakeven & Risk-To-Reward Ratio
Here is where most traders misunderstand breakeven: they think by becoming breakeven traders they have succeeded. That is like saying you purposely don't want to lose money with your business, if you are actually not making any profits.
Savvy traders use breakeven as the starting point for establishing a realistic profit target. The rule of thumb is that the minimum profit target should be at least twice the breakeven point distance. Therefore, if your breakeven point is 10 pips from your entry, it must be at least 20 pips found, with other brokers, you could choose anything, and within that distance would also be at breakeven distance from your entry. This represents a risk-reward ratio of 1:2.
Conclusion
Realising breakeven is fundamental learning to run before you can walk in trading. The breakeven point is your baseline defence – the minimum point before which any trade can be deemed successful, but remember breakeven is not your target it is only your starting line.
The most effective traders view breakeven as a planning tool, not a goal. They know the breakeven cost in advance and add those costs into their risk-reward ratios when trading. They use that information to make better trading decisions. Whether they go for 10 pips or 100 pips, they have confidence to carry through their strategy without worry about every move in the market.
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