How to Calculate Profit & Loss in FOREX Trading
Thousands of aspiring Forex traders come to the market each year to make their fortune, but many gloss over the fact that Forex trading is a business and, as in any business, you need to learn how to calculate profit and loss. Fortunately, it's not that hard if you understand a few simple formulas which will help you keep track of how you're winning at the trading game.
- Difficulty:
- Moderately Challenging
Instructions
-
It's Just Simple Math
-
1
Write out this simple formula on a paper pad: Profit = Price Change in Pips x Units Traded. For example, if your Forex broker requires a 1% margin for you to trade any currency pair, then you can control up to $100,000 with $1,000. So, in this example, if you buy 10 lots of a given currency pair to go long, then you control over $1,000,000 in this currency. Mark down the number of lots you have traded for the "Units Trading" component of the equation.
-
2
Use the same example as if you were buying a currency pair at price of 1.25 to go long and then make note of your entry price.
-
3
As the trade progresses, you then sell it at 1.40. Then you will have made 15 percentage in points, or pips. A pip is the smallest change of price for any foreign currency listed on the Forex. On a standard Forex lot, a pip is equal to $10 when the USD is the quote currency, so you will have earned $150 (15 pips X $10 per pip) per standard Forex lot in this example.
-
4
Using the Profit = Price Change in Pips x Units Traded formula to calculate Profit/Loss, your calculation would break down as $1,500 = 15 Pips gained x 10 Standard Forex Lots.
-
1
Tips & Warnings
Knowing your P/L is valuable because it not only lets you know how well you're staying ahead of the trading curve, but it lets you know how to define your risk by knowing your total portfolio value. If your risk is defined as 1% of your total portfolio value, then knowing your P/L lets you understand where your trading equity is and how much you can risk. Without knowing, you could risk too much or risk too little, thereby limiting your potential reward.
If you fail to keep track of your P/L then you need to re-evaluate why you are trading, because you are not treating it seriously enough. Forex trading is a business where the best in the world come to compete, and if you don't have the discipline to know where you're at financially on a day to day basis, then you run the risk of being run out of business by traders who treat this as the serious profession it is.
