Math Behind Trading

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Aug 5 . 3 min read

We might not be mathematicians but learning a bit of maths will definitely help boost our trading game.

I’ve got several friends that have been trading but they really have no idea how the math behind trading works. Yes, it’s fine as long as your trading strategy works, but knowing a few simple calculations will definitely change the way you trade the next time.

To make the calculations simple, I’ll be buying and selling of equal quantity

Since I am a crypto enthusiast, let me take Ethereum as an example:

Ethereum is currently trading at $392.0 at the time of writing this article.

I am buying 5 Ether at a price of $392 and the standard trading fee on the platform that I’m using is 0.1% per trade.

The trading fee in $ was calculated by the following equation:

Eq 1: Buying Price x Quantity x (Trading fee in % / 100)

The total amount spent in $ was calculated by the following equation:

Eq 2: (Buying Price x Buying Quantity) + Trading fee in $

Summary: I’ve bought 5 Ether for $392 each ($1910 total) and spent a trading fee of $1.96 for buying.

In the previous section, we had bought Ether for $392 each. I am expecting to sell my Ether if it reaches $400.

This trade will cost me $2 since the value of Ether has increased.

The total earned was calculated by the following equation:

Eq 3: (Selling Price x Selling Quantity)- Trading fee in $

and the net profit will be:

Eq 4: Total Earned in $ — Total spent in $

$1998 — $1961.96 = $36

I will make a profit of $36 when I buy 5 Ether at $392 and sell 5 Ether at $400

Sometimes, trades don’t go your way and the price could start collapsing after you buy. A popular strategy is to sell it and rebuy at a lower price which is called shorting.

In part 1, I had bought 5 Ether for a price of $392 each. What if the price falls to $385 and I want to sell all my Ether before it falls further? How much will I have lost in this trading process?

The net loss will be:

Eq 5: Total spent in $ — Total Earned in $

$1961.96-1923.08 = $38.88

I will face a loss of $38.88 when I buy 5 Ether at $392 and sell 5 Ether at $385

It’s not compulsory to know the math behind trading if your strategy is already working for you, but you could definitely do better by doing a few simple calculations.


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