Mastering Profit And Loss Calculation In Forex Trading

How to Calculate Profit and Loss?

How to calculate profit and loss

There are many types of calculations that one needs to perform to get the best results from forex trading. One of the main calculations a trader needs to perform before entering every trade is calculating the potential profits and losses. You must master this part of the trading process to become a skilled and successful trader in the volatile forex market. This is just as important as having analytic and trading skills. So, today we will learn about the simple process you can follow to determine the possible outcomes of your trade by mastering profit and loss calculation in forex trading.

Basics of Currency Pairs!

Basically, the trading instrument in the forex market is referred to as currency pairs, which represent a currency’s value compared to another currency. You can consider it as the exchange rate between two currencies like the US Dollar and Canadian Dollar. The currency pair is denoted using a short form representing the two currencies forming a pair. The pair that we have taken as an example is USD/CAD.

Here the price of this currency pair tells us how much CAD we need to buy one USD. The currency that comes first in a pair is the base currency, and the second one is just used for quoting the value of this base currency. The base currency will be the one that gets bought or sold while entering a trade. There are many currency pairs in forex, but the majority of trading volume is generated by major pairs, which include USD and another major currency from a developed economy.

The next category is minor or cross pairs which will not include USD but will have other major currencies quoted against one another. The third category is exotic pairs, with a weaker currency paired with a major currency. These weaker currencies belong to emerging and developed economies, and this combination makes exotic pairs the most volatile, least liquid and way riskier to trade with.

Understanding Pip Value and Position Size!

Pip value and position sizing are the most basic yet essential concepts you must learn and understand as a forex trader. Pip value is used to determine, track and calculate the price fluctuations in international currency pairs. Since the forex market is highly volatile, tracking the exchange rate movements is crucial for trading. The smallest movement in a currency pair’s price will be referred to as one pip, and the value of one pip will be different for each currency pair.

A trader needs to understand and calculate pip values regularly to plan and execute their trades precisely. Pip calculations can be tough for an average beginner, but many forex brokers and trading platforms do provide free online pip calculators that can give accurate and instant results by automating the calculation process.

Position size can be described as the amount of money you are willing to risk for a trade because the position size determines the amount of trading capital balance used for placing a particular trade. The position size or trade size is calculated in lots, and proper position sizing is a key component in risk management. You must consider your risk tolerance or risk profile while deciding your position size for a trade. Fortunately, traders can also find automated position size calculators for determining their position size. They just need to enter the details about trade and their risk percentage to know the ideal trade size in lots.

Forex Trading: Profit and Loss!

The concept of profit and loss is pretty simple in forex trading. When you enter a trade, you will be using a part of your funds, and when you close that trade, your account balance can either increase or decrease. If the account balance increases, the entered trade must have generated a profit, whereas a loss causes a decline in the account balance. But you need to remember that the cost of trading will also be reflected in your account balance, which the broker charges as spreads, commission or rollover fees. So, you might have to calculate it separately to get the actual trading result.

Most traders calculate their profits and losses as the number of pips they gained or lost in a trade. When you say that you made 25 pips profit in a trade, that would mean you gained that much money in your account base currency. That is why we talked about pip value calculation at the beginning of the article. The same theory applies to losses as well. Another thing to note is that when a trade is kept open, the profits/losses remain unrealised and will be reflected in your account balance only after closing the position.

How to Calculate Profit and Loss?

The formula for calculating the profits/losses is pretty simple. You just need to multiply the number of pips gained or lost with the position size chosen for the trade. But the currency pair and account base currency you choose will have a role to play in the actual profits or losses you get as the result of a trade. Most forex brokers will provide you with a profit calculator, which you can easily access to calculate profits you’ve earned in your desired currency. The best thing about this tool is that you can use it anytime, and it would be ideal to use it every time before placing a trade.

Calculating a trade’s potential profits and losses in advance is the best way to manage the risk of loss for a trade. You will be able to assess the risk and take relevant measures to minimise the same. You can also adjust your take-profit levels to improve the profit potential of a trade. Doing the profit or loss calculations manually, even for the most experienced trader, can take some time. So, every trader tends to rely on these automated tools to get the most accurate instant results with minimal effort.

But these calculators can only tell us the potential profits or losses of a trade at the given moment, and they won’t consider the incidence of various costs associated with trading. So, you need to check for variations in results caused by external factors like slippage, where the trade gets executed at a different price than what you had planned.

Conclusion!

To conclude, profit and loss calculations are inseparable from planning your trades. Many of your trading decisions will depend on the profitability or risk of loss that comes with a trade. You may decide to take up a trade or not go for it based on the results it can generate once you close the position. Hence, beginners must take some time to understand these concepts as it ultimately decides their chances of success in the forex market.

About Sashi 547 Articles
Sashi Singh is content contributor and editor at IP. She has an amazing experience in content marketing from last many years. Read her contribution and leave comment.

Be the first to comment

Leave a Reply

Your email address will not be published.


*