Forex, also known as foreign exchange or FX, is the decentralized market where currencies are traded. It is the largest financial market in the world, with an estimated $5.3 trillion worth of currencies being traded every day. One of the key aspects of forex trading is profit, which is the amount of money a trader makes from a trade. In this article, we will explain how forex calculates profit.
Forex profit is calculated using a simple formula: Profit = (Closing Price – Opening Price) x Units Traded x Exchange Rate. Let us break this formula down to understand it better.
Closing Price: The closing price is the price at which a currency pair is sold. It is the price at which a trader exits a trade. This can be either a profit or a loss, depending on whether the closing price is higher or lower than the opening price.
Opening Price: The opening price is the price at which a currency pair is bought. It is the price at which a trader enters a trade. This is usually determined by the trader’s analysis of the market and the factors that affect the currency pair.
Units Traded: The number of units traded is the amount of currency that a trader buys or sells. It is usually measured in lots, with one lot equal to 100,000 units of the base currency.
Exchange Rate: The exchange rate is the value of one currency in relation to another currency. It determines the price at which a currency pair is traded. For example, if the exchange rate between the US dollar and the euro is 1.20, it means that one euro is worth $1.20.
Now that we understand the basic components of the profit formula, let us look at an example to illustrate how it works.
Suppose a trader buys one lot of the EUR/USD currency pair at an opening price of 1.2000. The trader holds the position for a few hours and then sells it at a closing price of 1.2050. The exchange rate at the time of the trade is 1.2000. How much profit did the trader make?
Profit = (Closing Price – Opening Price) x Units Traded x Exchange Rate
Profit = (1.2050 – 1.2000) x 100,000 x 1.2000
Profit = 50 x 100,000 x 1.2000
Profit = $6,000
Therefore, the trader made a profit of $6,000 on this trade.
It is important to note that forex trading involves risks and it is possible to make losses as well as profits. Traders need to manage their risks by using stop-loss orders and position sizing. They also need to have a solid understanding of the market and the factors that affect it.
In conclusion, forex calculates profit using a simple formula that takes into account the closing price, opening price, units traded, and exchange rate. Traders need to understand this formula in order to calculate their profits accurately. However, it is important to remember that forex trading involves risks and traders need to manage their risks effectively.