In Forex, How are Profits and Losses Calculated?
If you are a trader, it is critical that you understand how to calculate your profit and loss on your forex trades, as well as how profit and loss affect your account margin. In this article, we have discussed in detail how profit and loss are calculated on any forex trading account in this article. We have also created a profit-and-loss calculator for your convenience.
The terms we should discuss before calculating profit/loss are realized and unrealized profit or loss, as well as pip size. What exactly are these?
Realized and Unrealized Profit/Loss:
In simple terms, we can say that when the trade is open for buy or sell, the profit or loss we see on our account is unrealized, as that is not finalised until we close the trade. It becomes the realised price when trade is closed. If our trade is closed in profit, the unrealized amount is added to our balance; if trade is closed in loss, it is subtracted from our account. If you are using Metatrader 4 or 5, you may see Balance, which displays your actual funds in the account, and Equity, which displays your floating profit or loss, also known as unrealised profit or loss when trades are open.
Point of Interest (PIP):
In forex trading, the term “pip” stands for “percentage in point.” It is a unit of measurement used to express the change in value between two currencies. For most currency pairs, a pip is the smallest unit of measure, and it is equal to 0.0001 of the quote currency but for JPY pairs it is 0.01.
For example, let’s say the EUR/USD exchange rate is currently 1.2050 and the trader buys 1 standard lot (100,000 units) of EUR/USD. The price of the pair then increases to 1.2070. The trader would have made a 20 pip profit, because the difference between the two prices (1.2070 – 1.2050 = 0.0020) is equal to 0.0020, or 20 pips.
In this example, the trader made 20 pips of profit because the value of the Euro increased against the value of the US dollar.
Profit Calculation:
The formula for calculating profit in forex trading is as follows:
Profit (pips) = Closing price – Opening price
For example, if a trader buys the CAD/USD currency pair at 1.25 and then sells it at 1.26, the profit would be:
Profit (pips) = 1.26 – 1.25 = 0.01
To convert the profit from pips to the base currency, you can use the following formula:
Profit (base currency) = Profit (pips) x Lot size x Pip value
Where:
- The lot size is the number of units of the base currency that you are trading. A standard lot size is 100,000 units.
- Pip value is the value of one pip in the base currency. This value will vary depending on the currency pair being traded and the size of the position.
For example, if you bought 1 standard lot (100,000 units) of CAD/USD at 1.25 and sold it at 1.26, the profit would be:
Profit (base currency) = 0.01 x 100,000 x 10 (pip value of CAD/USD) = $1,000
It’s important to keep in mind that in forex market traders use leverage to control larger trade sizes. Leverage will affect the profit calculation, as you need to consider the used margin for trade and not the actual amount of currency.
Loss Calculation:
The formula for calculating loss in forex trading is similar to the formula for calculating profit, but instead of subtracting the opening price from the closing price, you would subtract the closing price from the opening price. The formula is:
Loss (pips) = Opening price – Closing price
For example, if a trader buys the EUR/USD currency pair at 1.20 and then sells it at 1.19, the loss would be:
Loss (pips) = 1.20 – 1.19 = 0.01
To convert the loss from pips to the base currency, you can use the same formula as for-profit calculation:
Loss (base currency) = Loss (pips) x Lot size x Pip value
Where:
The lot size is the number of units of the base currency that you are trading. A standard lot size is 100,000 units.
Pip value is the value of one pip in the base currency. This value will vary depending on the currency pair being traded and the size of the position.
For example, if you bought 1 standard lot (100,000 units) of EUR/USD at 1.20 and sold it at 1.19, the loss would be:
Loss (base currency) = 0.01 x 100,000 x 10 (pip value of EUR/USD) = $-1,000
Just as before, it’s important to keep in mind that in the forex market traders use leverage to control larger trade sizes, and the used margin will affect the loss calculation.
