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Calculating Profit and Loss

The foreign exchange market is an around-the-clock cash market where the currencies of nations are bought and sold. Forex trading is always done in currency pairs. To understand how the exchange rate can affect the value of your Forex investment, a trader should know how to read a Forex quote.


Most online forex trading platforms like automatically calculate the Profit & Loss of a traders. However, it is useful to understand how the calculation process is.

Let's illustrate how to calculate the P&L:

The current bid/ask price for EUR/USD is 1.2320/23, meaning you can buy 1 euro with 1.2323 US dollars or sell 1 euro for 1.2320 US dollars.

Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

So you make the trade: to buy 100,000 euros you pay 123,230 dollars (100,000 x 1.2323). Remember, at 1% margin, your initial margin deposit would be $1,232 for this trade.

As you expected, Euro strengthens to 1.2395/98. Now, to realize your profits, you sell 100,000 euros at the current rate of 1.2395, and receive $123,950.

You bought 100k Euros at 1.2323, paying $123,230. You sold 100k Euros at 1.2395, receiving $123,950. That's a difference of 72 pips, or in dollar terms ($123,950 - $123,230 = $720).


So the total profit is US $720

That is how the process of calculation is done. When calculating profit or loss, the trader should consider the spread as well as the interest differential.


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14 comments:

Remas said...

Nice informative post!

Stomphoof said...

Very interesting! I learn something new every day.

Bhing said...

@Remas - Thanks for the support..

@Stomphoof - I agree with you.. It is really great to learn something new everyday.. So keep coming back here and I will try to post good content as much as possible.. :)

news headline said...

supporting your blog cheerrrs :)

$ Mad Money Renato $ said...

nice info, can we exchange links>??

http://www.madmoneyfund.blogspot.com/

Bhing said...

@news headline - Thank you so much for the support..

@Mad Money Renato - Sure! I just put your blog links to mine.. Just check it out!

manvyd said...

I like your blog it is relly hellpful

Sharon said...

I am glad I found this site indeed! I have a strong interest in the Forex but want to get as much knowledge as I can before plunging in. Great blog, great post!

I hope you will visit me in return.

Christina thecoffeelady said...

Too much for my brain this time of night! Good luck all!

MorgansMummy said...

Wow, when I was reading it (for the 5th time lol - you know what I mean) I didnt think that it sounded like a big profit, but then it said 7 hundred I was suprised!

corrin said...

Oh, I remember all this from grad school, and it gives me a bigger headache now than it did then. Haha.

I actually find it all very interesting, I just always really had to focus to grasp currencies.

Karen said...

Wow, that makes it so much easier to understand.

diamondmum said...

nice post Bhing! thanks for sharing:-)

Mr. I said...

Nice example for calculating the loss or profut.

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