Forex Trading - Profit and Loss Calculations

by: amaramar

Most online forex brokers you pick will have a trading platform that can automatically calculate your profit and loss. However, you should still understand what goes on behind the calculations. You'll be able to keep tabs on your broker's honesty that way, but you'll also have surer footing yourself as a trader if you know all of the fine details behind those calculations you depend on so much.

Profit and loss calculations are relatively simple. You just need to remember two basic formulas.
When the US dollar, also known as USD, is the "quote currency," or the second of the paired currencies, the formula is:

Profit = Price Change in Pips Times x Units Traded
When USD, or US currency, is the base currency or the first currency in a pair, the formula is:
Profit = Price Change in Pips x Units Traded / Exit Price

As an example to illustrate this, let's use the following scenario. USD is the quote currency and we will also say that the broker requires 1% margin. This means that you can trade $100,000 in currency for only $1000.

Therefore, if you are looking at EUR or USD, currently trading at 1.2518/9, you predict that the euro will rise in value against the US dollar. Therefore, you execute a trade to buy euros and simultaneously sell US dollars.

Therefore, you buy $100,000 worth of units at 1.2519. Remember that you have to take the asking price, or the second number in the quote.

If your calculations are correct and the price rises to 1.2532/3, you initiate a trade to sell euros and buy US dollars. For this trade, use the bid price, which is 1.2532.

Since you bought at 1.2519 and sold at 1.2532, you profit was 17 pips, or 0.0017. To convert that into real money, we use the formula above, so that it looks like so:

Profit = Price Change in Pips X Units Traded
Which means:
Profit = 0.0017 X 100,000 = $170.
In other words, you made $170 on that trade. If you trade $100,000 in a currency pair with the US dollar the quote currency, a pip will be worth $10. 17 pips equal $170.

When the US dollar is the base currency, let's say you buy 100,000 units of USD/JPY (Japanese yen) at 117.22. The price goes up and you sell at 117.35. Therefore, you just made 13 pips.
To calculate what your profit was, use the second formula:

Profit = Price Change in Pips X Units Traded / Exit Price
Which means:
0.13 X 100,000 / 117.35 = $110.78.
So as you can see, this is relatively simple once you get the hang of it.

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