Forex Profits and Losses - Calculating Them Properly

By: Ian Armstrong

Just about any online Forex broker you pick will have a trading platform available to automatically calculate your profit and loss. However, it's important to understand the basic math that goes into this. That's a good way to make certain that your broker is honest, and it's a good skill to have. Calculating profit and loss is fairly simple. There are only two simple formulas to keep track of.

When the quote currency is USD (the second part of a currency pair), the formula you'll need is: Profit = Price Change in Pips X Units Traded. If USD is the base currency (the first part of the currency pair), the right formula is: Profit = Price Change in Pips X Units Traded / Exit Price. Here are a few examples to help you better your understanding.

If the quote currency is USD, assuming that the broker requires a one percent margin, you'll be able to trade a hundred thousand dollars for only a thousand. If you're planning to trade EUR/USD (currently trading are about 1.2518/9), and you predict that the euro is going to rise in value against the dollar, you'll execute a trade to buy euros, selling USD at the same time. If you're buying, you'll have to take the asking price (the second number in the quote).

If your calculations are correct, and the price rises, you then initiate a trade to sell your euros and buy US dollars. At this time, you'll use the bid price, say: 1.2532. Since you were able to buy at 1.2519 and sell at 1.2532, you had a profit of seventeen pips, expressed as 0.0017. To convert that into real money, use the formula listed above: Profit = Price Change in Pips X Units Traded, or Profit = 0.0017 X 100,000 = $170.00

One easy rule to keep in mind is that when you're trading a standard sized lot of a currency pair (like 100,000) in which USD is the quote currency, a pip is always ten dollars. That means that seventeen pips equals a hundred and seventy dollars.

Now, we'll take a look at an example where the base currency is USD instead. When we decide to buy a hundred thousand units of USD/JPY at 117.22, and our calculations are correct, the price rises, and we're able to sell at 117.35. This earns us thirteen pips.

To calculate our profit, make use of the second formula: Profit = Price Change in Pips X Units Traded / Exit Price, or Profit = .13 X 100,000 / 117.35 = $110.78. It's really very simple.

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