Calculating profit and loss in Forex trading

by

Shawn James

The foreign exchange market, being the most liquid financial market in the globe, offers attractive benefits for investors. In addition to having access to real time rates, your profit and loss is computed on real time basis by the Forex trading platform you are using and is shown live online. As much as this is an essential merit in currency trading, it is important that you familiarize yourself with how profit and loss is formulated.

In general, there are two basic methods for calculating profit and loss in Forex trading: The first method involves calculating the profit and loss in United States dollar (USD) terms by multiplying the number of pips with the size of the lot traded. If the lost size is a standard lot of 100,000, then you multiply the pips with 10 USD, if the lot size is a mini lot of 10,000, then you multiply the pips with 1 USD, and so on. This method is used only when the quote currency (second currency in a pair) is USD. The following example illustrates this: Suppose you enter a long position in EUR/USD at 1.4000 and exit the trade at 1.4010 a few moments later. In this case, your profit will be 1.4010-1.4000 = 0.0010 or 10 pips (assuming no transaction charges incurred) And, because the quote currency in this pair is USD, profit and loss in USD terms is: 0.0010 x 100,000 = 100 USD or 10 pips x 10 USD = 100 USD The second method of calculating profit and loss in Forex trading involves dividing the number of pips with the exchange rate and then multiplying the result with the lot size traded. This method is used only when the quote currency is another currency other than the USD. The following example illustrates this: Suppose you enter a long position in USD/CHF at 1.2000 and exit the trade at 1.2015 a few moments later. In this case, your profit will be 1.2015-1.2000 = 0.0015 or 15 pips (assuming no transaction costs incurred) And, because the quote currency in this pair is CHF (other than USD), profit and loss in USD terms is: 0.0015/1.2015 x 100,000 = 124.84 USD In conclusion, it is of essence to note that locking your profits before their turn to losses is an important characteristic of a successful Forex trader. Therefore, if you know how to calculate profit and loss, you will be able to take your Forex trading career to the next level.

Shawn James has 7 years experience in the Financial Markets, for PRO Investment Bank as an Investment Analyst, before becoming a

Forex

trading expert in Australia.

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Calculating profit and loss in Forex trading