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How to Calculate Profit and Loss

August 4, 2011 By Leave a Comment

Though any forex broker of repute would provide you with a convenient trading platform by which you can easily calculate the profit and loss of your forex account, it is still better to know the logic and math behind such calculations. Not only does it allow you to assess the honesty of the broker, it also makes you more knowledgeable about the subject. After all, it is your own money that you are managing.

More than anything else, calculating your profit and loss is rather simple. Just make sure that you just remember two essential formulas. The first point to keep in mind that trading can not happen without the presence of two currencies, the quote and the base currency. While the quote currency is the second in the pair, the base is the first of the pair. So:

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 me explain this to you more in detail with the help of some real life examples.

Let us take the USD as the quote currency. To keep it simple for you, assure that the broker requires 1% margin. This means that you could trade $100,000 in currency for only $1,000

Take the example of a Euro/USD trading, which is currently trading at 102518/9. You are predicting that the value of the Euro will increase and so you decide to execute a trade by buying Euros. Remember you are also selling dollars simultaneously.

So you take a decision to buy $100,000 units at the price of 1.2519. Since you are buying you have to consider the ask price which is represented by the second number in the quote.

Let us assume that your predictions turn out to be correct and the price increases to 1.2532/3. Now you start the process of trading where you sell the Euro and buy USD. The bid prices are going to be used now which is 1.2532.

Since you bought at 1.2519 and sold at 1.2532 your profit was 17 pips, or 0.0017. To convert this into real money use the formula where:
• Profit = Price Change in Pips X Units Traded
• Or, Profit = 0.0017 X 100,000 = $170.00

One of the very easy rules to remember in forex trading is when you are trading a standard size lot, which is 100,000 or a pair of currencies where the USD is the quote currency, a pip is always equal to $10.and seventeen pips will always be $170.

Consider another example where the USD is the base currency. Let us assume a purchase of 100,000 units of USD/JPY at 117.22. If the price rises and we can sell these at 117.35 we have just gained by 13 pips. To calculate our profit in real money terms, we will put the second formula to use:

• Profit = Price Change in Pips X Units Traded / Exit Price
• Or, Profit = .13 X 100,000 / 117.35 = $110.78.

Now isn’t that simple and easy?

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Deciphering Stock Losses

August 4, 2011 By Leave a Comment

You can’t play the game of investing and stock markets without taking a loss. Nobody likes to experience losses but they still happen and you have to understand why they happen, when they are likely to happen and how to properly assess the risks you are liable to encounter when investing in the stock market.

If you have put down a lot of money and invested in a particular stock it can be rather disconcerting to see that stock price drop overnight. A lot of investors usually advocate the “buy and hold” philosophy in the hope that the price will come back up but a lot more people usually get scared and sell off their stock at the first sign of loss.

It takes a substantial amount of dedication as well as effort to continue to invest in a stock which appears to be dropping pricewise, however this is usually the best thing to do. Every investor has to know how to deal with short term market losses when they experience such losses. Knowing what to do is one thing but it certainly doesn’t make it easier on you when your finances are the worse for it.

The main thing you have to remember is that when you invest in stock you are taking up ownership of a company or business and not the stock. When you start looking at your investments like a business and get emotions out of the way, things will move much more smoothly for you. Gamblers tend to make bets on feelings and so-called emotional instincts, the stock market on the other hand is a business and cannot be approached in the same way. Investors need rationale and facts to support their actions.

The next important thing is to look at the rewards of long term investment. Short term losses could very easily equate to long term gains. Falling prices are a good thing in some cases, they are an opportunity to purchase more stock of great companies at a lesser price. Reduced prices would give you the opportunity to own a larger slice of the pie.

In your attempt to understand stock losses it is essential to note that smart investors would not want to invest more than they are willing to lose. Sticking to this rule will mean that any loss incurred won’t be as devastating as losses incurred by a man who blows his entire savings on some investment advice he heard in a bar and which was erroneously called “ a great deal”.

If you start off by investing smart and you only risk as much money as you are willing to lose, small losses won’t affect you with such great impact. It is also essential to note that on the whole, it really doesn’t matter; a lot of people get into stocks in order to own some part of a business. If this applies to you, you shouldn’t be bothered about the extra price tag associated with a piece of stock, you should be happy that you have been given to opportunity to own part of a business by owning some stock of the company.

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The Art of Investing Properly

August 4, 2011 By Leave a Comment

For anyone who is a new investor, one of the most essential skills that you need to pick up is learning how to pick out the right investment. How exactly do you know which stock is a good investment and which one is an unwanted opportunity you should pass up? How best can you determine whether investing in a particular company or business is worth your while? In order to succeed at this, you need to know what to look for in an investment so that you can make the right decision and know whether it is the right one for you or not.

Investments are about much more than having a feeling about a particular opportunity. People who invest strictly on instinct are just gamblers and a lot of people end up in trouble when they focus on investing this way. Instead of doing this, you can easily take the time out and learn how to invest properly , how to spot a great investment when it presents itself and how to properly investigate such opportunities.

These are some bits of advice and various ideas about what exactly you should be looking for in an investment and this will help you to choose the right stock picks on a rather regular basis.

1. How much is the entire company worth? Don’t just look at the current price of stock but instead look at the price of the entire company. What is the P/E of the company?

2. Does the company buy back shares? You should look to invest in companies that are actively trying to reduce the number of outstanding shares.

3. Why did you choose this company to invest in? Is your reason based on solid information or is it based on speculation.

4. What is your knowledge of the company and/or their products?

5. Would you be willing to keep ownership in this stock for 10 or more years? If not, then it may not be worth it for you to buy it.

6. Don’t follow the crowd just because everyone else is saying it’s good. Make your own decisions based on facts and not hearsay.

7. Invest in what you know. The more you know about it, the higher your chance for success, investing in what you have little or no knowledge about will almost always result in failure.

8. Don’t buy or sell on emotion. Do some research and examine the facts thoroughly before you make an investment.

If you stick to these laid out rules, you can be sure of getting on the fast track to becoming a very successful investor. People don’t become successful overnight; anyone who wants to become successful at investing needs to learn all that they possibly can and should never stop acquiring such knowledge. One of the many joys of investing is that there is always one new opportunity or the other to invest in and something new to be learned. You can also grow along with your portfolio and see your profits rise too.

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