Understanding Profit And Loss In Forex Trading

The whole purpose of forex trading is to make money, if you are trading without this goal in mind you must question your motives. However, due to the risk element involved profit is definitely not guaranteed. It makes understanding how to calculate profit and loss, along with understanding its importance in the realm of forex, crucial to success. Getting to grips with how to calculate both profit and loss isn’t as hard as you may think, as this article will explain.

Calculation

When the time comes to calculate either profit or loss in relation to your forex trading, take the price of the base currency at time of sale away from the price that was originally paid. Take the difference between the two figures and multiply it by the size of the transaction to get the required figure. You may have read that calculating profit and loss within forex trading is difficult, but remember that in reality it is relatively simple. Remember the equation, base currency sale price – base currency buying price x transaction size = profit or loss obtained.

Example

The following provides an example of a profit/loss calculation. If you buy Euros at £1.1821 and sell them at £1.1831, at a transaction size of 100,000, then your equation will be £1.1831 – £1.1821 x 100,000. The sum of this is £100 profit. As a second example, we will calculate a loss. Say you sell US dollars at £1.5367 after buying them are at £1.5377, at a transaction size of 100,000, the your equation will be similar to the one mentioned above, yet would result in a loss of £100 instead of a profit.

Importance

You would be surprised at just how many forex traders don’t understand how to correctly calculate their profits and losses. While many still get the equation wrong and mess up their bottom line in the process. Once you’ve got to grips with how to calculate profit and loss in forex trading, you will be able to operate a running score on your open trades. Substituting the current bid rate for the closing price will be able to give you an accurate estimation of how your trades are fairing. It should be noted that you should always factor in any commission into your losses and subtract such figure from away your profits as well. That way your forex trading bottom line can be truly accurate.

Final Thoughts

There is no denying it; forex will always be a risky avenue for a trader. In fact, risk will be waiting around almost every corner. In order to reduce this you need to make sure that you are both knowledgeable of the field and in control of your actions. One thing that you must be sure of when it comes to forex trading is the equation required to calculate both your profits and losses. Learn it, memorise it and most importantly use it, this way you can understand what your bottom line is and get to grips with where exactly your forex trading portfolio is falling short.

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