Forex, which stands for foreign exchange, is a decentralized market where currencies are traded. The forex market is the largest and most liquid financial market in the world, with an average daily trading volume of $5.3 trillion. Like any other financial market, the goal of forex trading is to make a profit. But how is total profit calculated in forex? In this article, we will explore the answer to this question.
Before we dive into how total profit is calculated in forex, it’s important to understand some basic concepts. The first concept is the exchange rate. An exchange rate is the value of one currency in relation to another. For example, if the exchange rate between the US dollar and the euro is 1.10, it means that one US dollar can be exchanged for 1.10 euros.
The second concept is the pip. A pip is the smallest unit of measurement in forex trading. It stands for “percentage in point” and represents the smallest change in the price of a currency pair. For most currency pairs, a pip is equal to 0.0001. However, for currency pairs that include the Japanese yen, a pip is equal to 0.01.
Now that we’ve covered the basics, let’s dive into how total profit is calculated in forex. Total profit in forex is calculated by subtracting the total cost of opening and closing a trade from the total revenue generated by the trade.
The total cost of opening and closing a trade includes the spread, commissions, and any other fees or charges associated with the trade. The spread is the difference between the bid price (the price at which a trader can sell a currency pair) and the ask price (the price at which a trader can buy a currency pair). The spread is typically measured in pips and varies depending on the currency pair and the broker. Commissions and other fees or charges are also added to the total cost of opening and closing a trade.
The total revenue generated by a trade is calculated by multiplying the number of lots traded by the pip value and the number of pips gained or lost. The pip value is determined by the currency pair being traded, the size of the trade, and the exchange rate. For example, if a trader buys 1 lot of EUR/USD at an exchange rate of 1.1000 and the price moves to 1.1100, the trader has gained 100 pips. If the trader’s account is denominated in US dollars, the pip value for this trade would be $10. Therefore, the total revenue generated by the trade would be $1,000 ($10 x 100 pips x 1 lot).
To calculate total profit, we need to subtract the total cost of opening and closing the trade from the total revenue generated by the trade. Let’s say the spread for EUR/USD is 1 pip, and the commission charged by the broker is $5 per lot. In this case, the total cost of opening and closing the trade would be $16 ($1 spread + $5 commission x 2 lots). Therefore, the total profit for this trade would be $984 ($1,000 revenue – $16 cost).
It’s important to note that the total profit can be positive or negative. If a trader sells a currency pair and the price goes down, they will make a profit. However, if the price goes up, they will make a loss. Similarly, if a trader buys a currency pair and the price goes up, they will make a profit. But if the price goes down, they will make a loss.
In conclusion, total profit in forex is calculated by subtracting the total cost of opening and closing a trade from the total revenue generated by the trade. The total cost includes the spread, commissions, and any other fees or charges associated with the trade. The total revenue is calculated by multiplying the number of lots traded by the pip value and the number of pips gained or lost. It’s important to remember that total profit can be positive or negative, depending on the direction of the price movement.
