Understanding Profit & Loss

Forex presents itself with opportunities, as well as risk to trades of various experience. To trade like a pro, it is vital to understand how much profit or loss there is on each of your trades. This can be worked before placing a trade, this will effectively help make decisions on placing stop losses, take profits and more.


1.Calculating Loss & Profit

During trading, there are two prices with each currency pair. A bid price (smaller number) and the asking price (bigger number). When buying on a pair, you open an order at the asking price and then close at its bidding price. Same goes when you sell on a pair of which you open at the bid price and close at the asking price.

Profit or loss is calculated from the trade based off the number of points the order has moved to subtract the price away from the closing price and then diving the answer by point size.

The formula for this step is:
(Close price - open price) / point size = points moved

2. Calculating point profit

Calculate your point profit, this would be the amount of profit or loss you can make for each currency pair that moves. Working this out is simple,  you just need to multiply the number of lots you traded, the contract size, and the point size.

Formula is:
Lots traded x contract size x point size = point profit

3. Calculating Profit/Loss

Lastly, multiply your points by point profit and you’ll have your answer! This will be expressed in quote currency (the second currency in the pair).

The formula for this final stage is:
Points moved x point profit = trade profit/loss
Still confused? Here’s an example


If you sell three lots of EURUSD at 1.2088 and close at 1.2078 and the price went down but, because you went short, you’ll have made a profit. Let’s find out how much.

(1.2078-1.2088)/0.0001 = -10 points moved
3 x 100,000 x 0.0001 = 30 points points profit
30 x -10 =  -300 USD profit

Because we went short, -300 works in our favor, so we actually made a profit of USD 300. When making a profit/loss calculation, remember to factor in whether you went long or short, as this will define whether you made a profit or a loss on each particular trade.

Conclusion
Looking to trade forex and seeking to calculate potential profit and loss should be a high priority for you. When trading with AUSFOREX, the platform that you’ll be using to trade will work out the profit and losses on all of your trades as they happen, both open and closed. However, it is crucial to understand these formulas so that you can effectively work out how best to structure your forex trades before you make them.

The next stage of your journey is to understand how to use the information you’ve learned in this post to set your take profit and stop loss orders, two tools that will transform how you plan your trading strategy. We’ve had a customized training plan and learning modules for your needs. Ask us how today!