How to Calculate Forex Profit and Loss

Calculating Forex Profit and Loss

Online forex trading offers number of distinct advantages. Besides real time rates, your profit and loss is calculated on real time basis by the forex trading software and is displayed live online. Even though this is an important advantage in forex trading account but I strongly recommend that you must be aware about the methodology to calculate your profit and loss from forex trading.

Basically there are two straightforward rules for calculating your profit and loss from forex trading:

1. Rule No.1: Whenever the quote currency (second currency) is USD, you can calculate the profit and loss in USD terms by multiplying the number of Pips with 10 USD if the lot size is a standard lot of 100,000. Similarly in case of mini lot of 10,000, the profit and loss from forex trading can be calculated by multiplying the number of Pips with 1 USD.
2. Rule No.2: In case of quote currency other than USD, the profit and loss will be calculated by dividing the number of pips with the exchange rate and then multiplying the result with lot size.

Let us discuss few factual examples on how to calculate profit and loss from forex trading. I have illustrated three examples – one example with USD as the quote currency and two examples with JPY as the quote currency. For simplicity only Long trades (Trades where you buy first and then sell) are considered. The lot size is assumed as standard lot of 100,000 and lot quantity is taken as 1 Lot.

Calculation of Profit and Loss for EURO/USD Trade

• Buy trade executed at 1.5555 and sell trade executed at 1.5560.
• Profit/Loss = 1.5560 – 1.5555 = 0.0005 OR 5 Pips.
• Since the quote currency (second currency) is USD, profit and loss in USD terms = 0.0005 x 100,000 = 50 USD ALTERNATIVELY profit and loss = 5 Pips x 10 USD =50 USD
• If you are a trader from EURO zone and you wish to calculate your profit and loss in EURO terms then you need to apply basic math. Divide your USD profit and loss by the exchange rate i.e. 1.5560. It works out to 50/1.5560 = 32.13 EURO. This point has been explained just for the academic interest as all the forex trading brokers display your profit and loss in USD terms.

Calculation of Profit and Loss for USD/CHF Trade

• Buy trade executed at 1.0473 and sell trade executed at 1.0488.
• Profit/Loss = 1.0473 – 1.0488 = 0.0015 OR 15 Pips.
• Since the quote currency (second currency) is CHF (other than USD), profit and loss in USD terms = 0.0015/1.0488 x 100,000 = 143.02 USD.

Calculation of Profit and Loss for USD/JPY Trade

• Buy trade executed at 108.09 and sell trade executed at 108.30.
• Profit/Loss = 108.30 – 108.09 = 0.21 OR 21 Pips.
• Since the quote currency (second currency) is JPY (other than USD), profit and loss in USD terms = 0.21/108.3 x 100,000 = 193.91 USD.

Wrapping up

Well-timed locking of your profit and booking of your loss in foreign currency trading is the most important trait for being a successful forex trader. Hence the knowledge of how to calculate profit and loss from forex trading plays a very important role in flourishing the online forex trading business.