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How to Calculate Your Profits and Losses in Forex Trade

calculatingYou might find this topic to be rather infructuous as almost all online forex brokers calculate your profits and losses for you in their trading platforms. So why write an article on this topic? It would seem meaningless, but that is not so in reality.
There is a reason behind this. Firstly you need to understand the mathematics behind your trades and secondly it will help you to ensure that your forex broker is not manipulating your forex accounts. If you know the mathematics behind your trades and how the pips translate to actual profits or losses, you in effect understand your trades. So knowing how to calculate profits and losses in forex trading is a must, even though you might be otherwise mathematically enlightened.

Formula for Calculating Profits and Losses

To understand the rationale behind calculating profits and losses in forex trading, you need to commit to memory a couple of formulae.

When the US Dollar is the quote currency i.e. the second currency the formula to use is:

a) Profit = Price change in pips x traded units.

When the US Dollar is the base currency, i.e. the first currency in the pair, the formula to use is:

b) Profit = Price change in pips x units traded/ exit price.

Examples of Calculating Profits and Losses

Let us take a few examples to understand these points.
Consider the situation when the US Dollar is the second currency or quote currency. For this example we are going to assume broker margin of 1% which means you are going to trade up to 100,000 US Dollars with only US Dollars 1000.
O.K… Let us go further with the example.
For the purpose of this example, we are going to take EUR/USD trading at 1.5015/16. Let’s assume that your analysis has indicated that the Euro was going to rise in value against the dollar. So what do you do? You start a trade to buy more Euros and sell US Dollars.
So you end up buying $ 100,000 worth of units at a price of 1.5016. Now here is the catch. You are buying so you have to buy at the ask price—-i.e. the second number in the quote, which in this case is the ask price of 1.5016.
Now let’s assume your prediction turned out to be correct and assume the price rise reads as 1.5020/21. Simultaneously you also start anther trade to sell the Euros and buy US Dollars. In this case you got to use the bid price of 1.5020 as you are selling.
Now we got to get on to the actual calculations. As the Euros were purchased at 1.5016 and then sold at 1.5020 the profit are 4 pips or 0.0004. The next step is to convert that into proper money and we got to refer to the formulae now.
Profits = 0.0004 (price change in pips) x 100,000 (units traded) = $ 40
A quick rule of thumb to remember is that a pip equals $ 10. So 4 pips is equal to $ 40. This is only if trading is done in standardized sized lots of currency pair as we did in the example above. This rule would not work otherwise.
Let’s now look at another example in which we use the US Dollar as the base currency.
Assume we place a buy order for 100,000 units of USD/JPY at 102.10. The price increases and you sell at 102.15. You just made a quick 5 pips. How do we calculate the profit? Use the second formula.
Profit = .05 (pips) x 100,000 (units traded)/102.15 (exit price) = $ 48.95
Calculating profit in forex trading is as easy as that. Since this article is only informative in nature, you would do well to learn more about this by engaging more and more in paper trading.

Conclusion

Finally when you enter forex markets and trade you automatically encounter risks that are inherent in the market. Despite that you continue to trade, because you expect to make profits. Surely it is not about guessing or gambling or taking a punt. You must take forex positions only on your own terms and that should be a calculated business decision. In other words through skillful analysis of past and present price action and with your knowledge of calculating profits and losses in individual trades, identify the correct opportunity to profit from a particular currency trend. Combine this analysis with your own safety parameters to eliminate risks and start trading. Doing so is no different from any normal business transaction you might make elsewhere.

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