HOW TO CALCULATE PROFITS AND LOSSES OF FOREX TRADING

Trading in the Forex market is done by investors mainly in the hope of making a profit. Profits and losses are calculated over a length of time and if you have more transactions in which you have been successful than those in which you have failed

then you are deemed to be profitable. It is useful to know how to calculate profits and losses of Forex trading. There are two basic methods in which this can be done.

They are:

     1. When the quote currency is the US dollar, you are able to calculate profit or loss of the transaction in US dollars. This is done by multiplying the pips by 10 USD for a standard lot size of 100,000. In the case of a mini account the calculation will be by 1 USD.

Example: EURO/USD

EURO/USD    1.3444    1.3449

The pip value here is 5

Profit/loss in USD: 0.0005 x 100, 000 = 50 USD or 5 pips x 10 USD = 50 USD.

  

     2. Where the quote currency is not the USD, profits or losses are calculated by dividing the amount of pips by the exchange rate and then multiplying that by the size of the lot.

Example: USD/CHF

USD/CHF    1.2758      1.2773

Profit/loss = 1.2758 – 1.2773 = 0.0015 or 15 pips

Profit/loss in USD terms = 0.0015/1.2773 x100, 000=117.43 USD

Calculating in the Forex trades is two sided. You can calculate from the currency you bought or the one you sold as both these take place simultaneously in the same transaction. For the purposes you can always do it from the currency that you bought.

Another important factor that has to be taken into consideration is leverage. This can be anything from 50:1 and upwards according to the size of the account and the leverage offered by the Forex broker. Profits and losses are calculated in accordance with the leverage. The profits will be augmented by leverage and in the same way losses will also be bigger. This is the reason why losses are minimized by placing stop loss orders when trading Forex and especially when trading with leverage.