Forex trading can offer significant opportunities to traders of all experience, but if you’ve just opened a trading account and want to learn how to trade forex like a pro, it is crucial that you are always fully aware of how much money you are risking and what results are possible on each particular trade. If you can work this out before you place your trade, you can then make informed decisions when setting stop loss, take profits, and more.
Explaining currency pairs
Forex pairs are usually listed in the market watch section of your trading platform and are readily available to trade with just a few clicks. The pair usually displays a live-price down to the pip value next to the two currencies. The two currencies combine to form a trading asset that is divided into the base and quote currency. Let’s use EUR USD as an example.
The first currency is Euro. This is known as the base currency. USD is the US Dollar. In this example, USD is the quote currency. Trading is about using the price fluctuations of the exchange rate between the base currency and the quote currency with the aim to benefit from the difference.
Basically, a trader would aim to buy EUR USD when the rate is low, then later sell it after the exchange rate rises. The most popular forex assets include USD JPY, and USD CHF, but EUR USD is by far the most popular currency in forex trading. This is because the currencies with USD have a higher trading volume, which on average, makes the exchange rate fluctuations less volatile. Forex pairs with low trading volumes may not be suitable for beginner traders with a limited budget. It’s not unusual to see a risk warning in articles that speak about volatile assets. If you are about to start trading for the first time, it might be best to avoid high risk currencies.
Point and Pip Value
In the retail world, we see prices measured to a cent. For example: $1.19.
Forex analysts will often speak about pip value or point when describing an asset price move.
This is because trading prices go beyond cents. Some assets such as EUR USD (Euro Vs US Dollar, and USD CHF (US Dollar Vs Swiss Franc) show five decimal places. For example: 1.19235. The “pip value” is the last decimal place. If you hear that the price has gone up by one pip value, then expect to see 1.19236. With Exness, a point is 10 pips. If USD gets stronger and the price goes up again, this time by one point, then expect to see 1.19246
Note: Not all forex pairs have four decimal places. USD JPY (US Dollar Vs Japanese Yen) only has two decimal places. For example 111.45. Again, the pip is the last or smallest digit. If you trade base currency pairs that include USD, the moves probably won’t be as volatile as exotic pairs, but you can still see point movement in a single day, especially when trading after a USD related economic news release.
Calculating Profit and Loss from the price
Now you know how pairs create an asset, let’s look at how trading prices are determined. When you trade forex, you’ll see two prices associated with the trading asset. The bid price (the smaller number) and the 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.That’s trading in a nutshell. The goal is to buy when the ask price is low, then wait until the bid price is higher.
Calculate profit and loss in points
To figure out 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 pairs, 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 it out you’ll probably need a calculator. 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 and 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
Does it all sound Confusing? Check Out This Example:
You sell three lots of EUR USD at 1.2088 and close the order 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 money on each particular trade or not.
If you want to trade forex, you need a trading account fully registered and verified. That usually takes around ten minutes, if you have all the necessary documents and a valid payment system. Knowing how to trade is obviously the first thing you need to know, but learning how to calculate potential profit and loss should be a high priority for you too. It might all seem like pointless math since the trading platform does it for you, but understanding how your results are generated will help you make smarter, more achievable decisions on what you trade and how much you invest.
When trading with Exness, the platform that you’ll be using to trade will work out the result of all of your trades in real time, both open and closed. No calculator needed.
Top tips for new traders
Remember, trading is not a sprint, it is a marathon. Like anything of great value or achievement, dream-results won’t happen overnight. After you’ve funded your trading account, calculate a daily budget for trading and stick to it. Consider using low leverage for volatile assets and higher leverage only for less liquid assets that don’t see massive market movements. See how high the highs are and typically how low the lows are, then make a realistic goal for when to enter and exit a trade.
Trading is easy and you can start today without any experience. After all, it’s just choosing whether a price will go up or down… right? Think again! If you don’t invest your time in learning and developing strategies and money management systems, losing can be easy too. Even pro traders get it wrong. Don’t guess. Be cautious and wait for strong opportunities to appear. Take it step-by-step and only start raising your daily trading budget after you’ve seen promising results.
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 and execute your trading strategies. We’ve put together a handy guide for you to get started straight away. Take a look!
Interested in giving forex a try? Open an account and trade with Exness from as little as USD 1. Click here to get started.