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Calculating Profit and Loss
Pretty much any online forex broker you choose will have a trading platform that automatically calculates your profits and losses for you. But I think it's important to understand the basic math behind it. It's a good way to make sure your broker is honest, plus it's just good to know.
Besides, calculating profit and loss is really simple. There's only two simple formulas to remember.
When USD is the quote currency (the second currency in a pair), the formula is:
Profit = Price Change in Pips X Units Traded
When USD is the base currency (the first currency in a pair), the formula is:
Profit = Price Change in Pips X Units Traded / Exit Price
Let's look at some real-life examples to help you understand.
First we'll look at an example when USD is the quote currency. To keep things simple we'll assume the broker requires 1% margin, which means you can trade $100,000 in currency for only $1,000.
So let's say you are looking at EUR/USD which is currently trading at 1.2518/9. You predict the euro will rise in value against the euro so you execute a trade to buy euros, which means you also simultaneously sell USD.
You buy $100,000 units at 1.2519. Remember since you are buying you have to take the ask price, which is the second number in the quote.
Your calculations are correct and the price rises to 1.2532/3. You initiate a trade to sell EUR and buy USD. This time you use the bid price, which is 1.2532.
Since you bought at 1.2519 and sold at 1.2532 your profit was 17 pips, or 0.0017. Now we need to convert that into real money. So take your formula above:
Profit = Price Change in Pips X Units Traded
Or,
Profit = 0.0017 X 100,000 = $170.00
An easy rule to remember is that when trading a standard sized lot (100,000) of a currency pair in which USD is the quote currency, a pip is always equal to $10. 17 pips equals $170.
Now, let's look at an example where USD is the base currency. We'll execute a buy of 100,000 units of USD/JPY at 117.22. The price rises and we sell at 117.35. We just made 13 pips.
To calculate our profit we use the second formula:
Profit = Price Change in Pips X Units Traded / Exit Price
Or, Profit = .13 X 100,000 / 117.35 = $110.78.
Nice and simple.
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Forex trading involves substantial risk of loss, and may not be suitable for everyone.