Forex trading is the buying and selling of currencies on the global market. Traders engage in this market to make profits from the fluctuating exchange rates of different currencies. The process of calculating profit on forex can seem daunting to beginners in the trading world, but it is relatively straightforward. In this article, we will explore how to calculate profit on forex.
Before we delve into the details of calculating profits, it is essential to understand some basic terms used in forex trading. The first term is the pip. A pip is the smallest unit of measurement in the forex market, and it represents the fourth decimal place in most currency pairs. For example, if the exchange rate of the USD/EUR currency pair changes from 1.2000 to 1.2005, it means that the price has moved up by 5 pips.
The second term is the lot size. A lot size represents the number of currency units traded in a single transaction. In forex trading, there are three types of lot sizes – standard, mini, and micro. A standard lot size represents 100,000 units of the base currency, while a mini lot size represents 10,000 units. A micro lot size represents 1,000 units.
Now that we have a basic understanding of the terms used in forex trading let us move on to calculate profits. The profit or loss on a forex trade is determined by the difference between the entry and exit prices of a currency pair. If the entry price is lower than the exit price, the trade is profitable, and if the entry price is higher than the exit price, the trade is a loss.
To calculate profit, the first step is to determine the lot size of the trade. Let us assume that a trader bought a standard lot of the USD/EUR currency pair at an entry price of 1.2000 and exited the trade at an exit price of 1.2050. The difference between the entry and exit price is 50 pips.
The next step is to calculate the value of each pip. In this case, the value of each pip is $10. To calculate the value of each pip, divide the lot size by the exchange rate. For a standard lot of the USD/EUR currency pair, the lot size is 100,000 units, and the exchange rate is 1.2000. Dividing the lot size by the exchange rate gives us $83.33 per pip. Since the USD is the base currency in this currency pair, we need to convert this value to dollars.
Now that we know the value of each pip, we can calculate the profit or loss. In this case, the profit is $500 since the difference between the entry and exit price is 50 pips, and the value of each pip is $10.
Let us take another example, where a trader sells a mini lot of the USD/JPY currency pair at an entry price of 109.00 and exits the trade at an exit price of 108.50. The lot size is 10,000 units, and the exchange rate is 109.00. Dividing the lot size by the exchange rate gives us 91.74 yen per pip. To convert this value to dollars, we need to divide by the USD/JPY exchange rate, which is 109.00. This gives us a value of $0.840 per pip.
In this case, the difference between the entry and exit price is 50 pips, and the value of each pip is $0.840. The profit is, therefore, $42.
Calculating profit on forex trades is relatively simple, but it is essential to remember that there are other costs involved in trading, such as spread and commission. The spread is the difference between the bid and ask price of a currency pair, and it varies from one broker to another. The commission is the fee charged by the broker for executing a trade.
In conclusion, calculating profit on forex trades is a straightforward process that involves determining the lot size, calculating the value of each pip, and subtracting the entry price from the exit price. It is essential to remember that other costs such as spread and commission can affect the overall profitability of a trade. With practice and experience, traders can become proficient in calculating profits and making profitable trades in the forex market.
