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?
