Forex, also known as foreign exchange, is a decentralized global market where currencies are traded. It is the largest and most liquid financial market in the world, with an estimated daily turnover of $5.3 trillion. Forex trading involves buying and selling currencies with the goal of making a profit. As with any investment, there is always the possibility of incurring losses. In this article, we will explain how forex gain or loss is calculated.
Forex Gain or Loss
Forex gain or loss is the profit or loss that arises from trading currencies. It is calculated by comparing the purchase price of a currency to its selling price. If the selling price is higher than the purchase price, then the trader makes a profit. If the selling price is lower than the purchase price, then the trader incurs a loss.
Forex gain or loss can be realized or unrealized. A realized gain or loss occurs when the trader closes a trade and receives the profit or loss in cash. An unrealized gain or loss occurs when the trader holds onto a trade and has not yet closed it. The gain or loss is only realized when the trade is closed.
Calculating Forex Gain or Loss
The calculation of forex gain or loss is straightforward. It involves the following steps:
Step 1: Determine the trade currency
The trade currency is the currency that the trader is buying or selling. For example, if the trader is buying the euro and selling the US dollar, then the trade currency is the euro.
Step 2: Determine the base currency
The base currency is the currency that the trader is using to make the trade. For example, if the trader is using US dollars to buy euros, then the base currency is the US dollar.
Step 3: Determine the exchange rate
The exchange rate is the price at which the trade currency can be exchanged for the base currency. It is quoted as a ratio, such as EUR/USD 1.1200. This means that one euro can be exchanged for 1.1200 US dollars.
Step 4: Determine the trade size
The trade size is the amount of the trade currency that the trader is buying or selling. For example, if the trader is buying 100,000 euros, then the trade size is 100,000 euros.
Step 5: Calculate the profit or loss
To calculate the profit or loss, the trader needs to determine the difference between the purchase price and the selling price. If the selling price is higher than the purchase price, then the trader makes a profit. If the selling price is lower than the purchase price, then the trader incurs a loss.
The profit or loss is calculated using the following formula:
Profit or Loss = (Selling Price – Purchase Price) x Trade Size
For example, if the trader buys 100,000 euros at an exchange rate of EUR/USD 1.1200 and sells them at an exchange rate of EUR/USD 1.1300, the profit or loss would be:
Profit or Loss = (1.1300 – 1.1200) x 100,000 = $1,000
This means that the trader would have made a profit of $1,000 on the trade.
Conclusion
Forex gain or loss is the profit or loss that arises from trading currencies. It is calculated by comparing the purchase price of a currency to its selling price. If the selling price is higher than the purchase price, then the trader makes a profit. If the selling price is lower than the purchase price, then the trader incurs a loss. The profit or loss can be realized or unrealized, depending on whether the trade has been closed or not. Forex gain or loss is an important aspect of forex trading and should be understood by all traders.
