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Calculating Profit/Loss in Forex Trading

admin on April 7th, 2009

Trading currencies involves more than technical knowledge and up to date information regarding market news and events. Each trade has its own numeric particularities, which will determine your profit/loss depending on several factors, such as: lot size, pip value, spread and leverage. This article will explain in 3 examples how you can manage your buy/sell orders in order to successfully achieve the expected results for each one of them.

In our first example, we are going to buy the EUR/CHF pair (euro vs. Swiss franc). Buying this pair means that we are expecting the euro to gain value against the Swiss currency. Considering this order to be worth 10,000 EUR we can use a simple calculation to determine the amount of euros in one pip of profit or loss. Here are the numbers:

The EUR/CHF long (buying) price is at 1.5187 and 0.0001 is one pip. To determine the value of one pip from 10,000 EUR we have to do the following:

(Pip value/pair price) x order sum, and in this case it would be:

(0.0001/1.5187) x 10000 = 0.65 euro cents

It is very important to stress on the pip value, since pairs values can be tricky enough to the point any distraction may lead the trader to make mistakes, the same amount of money when trading different pairs can affect drastically the pip value, and by consequence, your profit/loss ratio.

Let’s consider you could have closed your market order at 1.5205. How can we calculate our profit?

Taking into account that we had a 2 pips spread when opening our order, and from 1.5187 to 1.5205 we have a profit of 18 pips minus 2 pips from our initial spread value. Our pip value as mentioned above is 0.65 euro cents, giving us a final sum of 0.65 × 18 = 11.70 euros.

The second example will stress on the effectiveness of scalping within a low-spread market. The pip spread value may vary from one broker to another, and generally, different moments and events affect the spread size directly. Normally the pair with the lowest spread size is the EUR/USD, and considering that scalps normally have small pip-profits, using a high leverage is the key to have substantial profits while scalping.

Let’s imagine the following values for the EUR/USD 1.3145, with a one pip spread size. If you have 1.000 USD and a leverage of 1:100, you can trade lots worth up to 100,000 USD, which in this case would mean a 30 USD profit for a 3 pips positive closed market order.

Our final example will approach a strategy for avoiding losses while trading Forex. The same value for the EUR/USD from the example 2 can be used for this example, selling the EUR/USD at 1.3145, and remembering that your target price would be probably be achieved after a period in which you may not be able to verify the order constantly, it is wise to set a stop/loss value for the next support/resistance point, which in this example, would be 1.3100. The lot size is equivalent to 10,000 USD, giving a pip value of 1.00. Market events and political decisions may have a strong influence on the Forex market, so imagining that a favorable decision for the USD made the pair go to 1.3055, your stop/loss helped you to avoid losing more 45 dollars, giving you a much less significant loss than if you would not have set a stop/loss price for the order.