Forex can offer significant opportunities, as well as risks, to traders of all experience levels. If you want to learn to trade forex like a pro, it is crucial that you're always fully aware of how much profit or loss you're set to make on each particular trade. If you can work this out before you place your trade, you can then effectively make decisions on placing stop losses, take profits, and more.
Calculating Profits & Losses
When you trade forex you’ll see two prices associated with each currency pair. A bid price (the smaller number) and an ask price (the bigger number). When you buy (or go long) on a pair you open an order at the ask price and then close at the bid price. Similarly when you sell (or go short) on a pair you open at the bid price and then close at the ask price.
Step 1. Calculate profit/loss in points
To calculate the profit or loss of a trade, calculate the number of points your order has moved subtracting your open price away from your close price, and then divide the answer by point size. For most common pairs with Exness, the point size is 0.0001.
The formula for this step is:
- (Close price - open price) / point size = points moved
Step 2. Calculate point profit
You then need to calculate your point profit. This is the amount of profit or loss you can make for each point that the currency pair moves. To work this out is simple. All you need to do is multiply the number of lots you traded, the contract size, and the point size.
The formula for this second step is:
- Lots traded x contract size x point size = point profit
Step 3. Calculate profit/loss
Finally, multiply your points by point profit and you’ll have your answer! This will be expressed in quote currency (the second currency in the pair).
The formula for this final stage is:
- Points moved x point profit = trade profit/loss
Sound Confusing? Check Out This Example:
You sell three lots of EURUSD at 1.2088 and close at 1.2078.
The price went down but, because you went short, you’ll have made a profit. Let’s find out how much.
- (1.2078-1.2088)/0.0001 = -10 points moved
- 3 x 100,000 x 0.0001 = 30 points points profit
- 30 x -10 = -300 USD profit
Because we went short, -300 works in our favor, so we actually made a profit of USD 300.
When making a profit/loss calculation, remember to factor in whether you went long or short, as this will define whether you made a profit or a loss on each particular trade.
If you want to trade forex, learning how to calculate potential profit and loss should be a high priority for you. When trading with Exness, the platform that you’ll be using to trade will work out the profit and losses on all of your trades as they happen, both open and closed. However, it is crucial to understand these formulas so that you can effectively work out how best to structure your forex trades before you make them.
The next stage of your journey is to understand how to use the information you’ve learned in this post to set your take profit and stop loss orders, two tools that will transform how you plan your trading strategy. We’ve put together a handy guide for you to get started with straight away. Take a look!
Interested in giving forex a try? Open an account and trade with Exness for as little as USD 1. Click here to get started.