Friday, 17 February 2017

How your forex profit/loss is calculated.

                                 How your forex profit/loss is calculated.

This is how to calculate your forex profit or how it is calculated by your forex broker.
Before we can calculate our forex profit, we need to know what our forex pips,pip value and lots are.

What is a pip?
In forex, a percentage in point or price interest point(pip) is a unit of change in an exchange rate of a currency pair. If the GBP/USD moves from 1.2204 to 1.2205 this is ONE PIP. A pip is the last decimal of a quotation. The pip is how you measure your profit or loss.

As each currency has its own value of pip, example in USD/JPY rate at 119.70(notice this currency pair only goes to two decimal
places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01
.01 divided by exchange rate = pip value
.01 / 119.70 = 0.0000835
This looks like a very long number but later we will discuss lot size.

.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one more step.

.0001 divided by exchange rate = pip value
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001

Now, you know how your forex pip and pip value are calculated, now lets us move to how calculate your forex lots.

What is forex lot?
Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments,you need to trade large amounts of a particular currency in order to see any significant
profit or loss.
Let’s assume we will be using a $100,000 lot size. We will now recalculate some examples to see how it affects the pip value.
USD/JPY at an exchange rate of 119.80
(.01 / 119.70) x $100,000 = $8.35 per pip
USD/CHF at an exchange rate of 1.4556
(.0001 / 1.4556) x $100,000 = $6.87 per pip
In cases where the US Dollar is not quoted first, the formula is slightly different.
EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
GBP/USD at an exchange rate or 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Your forex broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.
    Now, you know how your forex trading lot is calculated, let us calculate our forex profit now.

Calculation of forex profit.

Let’s buy US dollars and Sell Swiss Francs.
The rate you are quoted is 1.4525 / 1.4530. Because you are buying US you will be working on the 1.4530, the rate at which traders are prepared to sell.
So you buy 1 lot of $100,000 at 1.4530.
A few hours later, the price moves to 1.4550 and you decide to close your trade.
The new quote for USD/CHF is 1.4550 / 14555. Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the 1.4550 price. The price traders are prepared to buy at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
Using our formula from before, we now have (.0001/1.4550) x $100,000 -= $6.87 per pip x 20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote.
When you buy a currency you will use the offer price and when you sell you will use the bid price.
So when you buy a currency, you pay the spread as you enter the trade but not as you exit.
And when you sell a currency you don't pay the spread when you enter but only when you exit.

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