How To Calculate Profits And Losses In Forex Trading

This topic will cover trivial mathematics to help you calculate profits and losses. You will also learn what is pip

and lots.

# What is a Pip?

Pip is the most common unit and the smallest possible increment in the value of currency pair. If the value of

EUR/USD changes from 1.2250 to 1.2251, this means a 1 pip appreciation in the value of EUR/USD. The last

decimal place of a quotation is called pip. It also helps to indentify your profits or loss.

Each currency has its own value, which makes it is mandatory to compute the value of a pip for that particular

currency. In currencies pairs where the USD (United States Dollar) is the base currency (or quoted first) the

calculation would be as follows.

Let’s assume USD/JPY current rate is at 119.80 (note USD/JPY currency pair only have two decimal places,

whereas most of the other pairs have four decimal places)

In the case of USD/JPY, 1 pip would represent 00.01

Therefore,

**USD/JPY: **

119.80

.01 divided by exchange rate = pip value

.01 / 119.80 = 0.0000834

This looks like a very long number but later we will discuss lot size.

**USD/CHF:**

1.5250

.0001 divided by exchange rate = pip value

.0001 / 1.5250 = 0.0000655

**USD/CAD:**

1.4890

.0001 divided by exchange rate = pip value

.0001 / 1.4890 = 0.00006715

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.

**EUR/USD: **

1.2200

.0001 divided by exchange rate = pip value

so

.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

So

0.00008196 x 1.2200 = 0.00009999

When rounded up it would be 0.0001

**GBP/USD:**

1.7975

.0001 divided by exchange rate = pip value

So

.0001 / 1.7975 = GBP 0.0000556

But we need to get back to US dollars so we add another calculation which is

GBP x Exchange rate

So

0.0000556 x 1.7975 = 0.0000998

When rounded up it would be 0.0001

You might be bit overwhelmed but this is put to only explain how to calculate pip value. Almost all brokers will

do all this tedious calculation automatically. However it is good to know how it works.

In the next section, we will discuss how these seemingly insignificant amounts can add up.

## What is Lot?

Spot Forex transaction is in lots. Lots are the number of unit of base currency that you buy or sell. The standard

lot size is 100,000; the mini lot size is 10,000 whereas micro lot size is 1,000. As previously explained the

smallest increment of that currency that could be measure is known as Pip. Forex trader trade large amounts of

any picky currency so that the smallest increment could produce significant profit or loss.

Let’s suppose we will be trading standard 100,000 lot size. We will now recalculate some of the above example

to check how it influences the pip value.

USD/JPY at an exchange rate of 119.90

(.01 / 119.80) x $100,000 = $8.34 per pip

USD/CHF at an exchange rate of 1.4555

(.0001 / 1.4555) x $100,000 = $6.87 per pip

In cases where the United States Dollar is not base currency (quoted first), the formula will be 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.

# How to calculate Profi t And Losses?

Let take an example in which we buy United Stated Dollar (USD) and Sell Swiss Francs (CHF).

The rate of the pair will quoted like 1.4525 / 1.4530. As we will be buying United States dollar we will be

working on the 1.4530 which in fact is the rate at which other traders are prepared to sell.

Let say, you buy 1 standard of 100,000 lot size at 1.4530.

After some time the price moves from 1.4530 to 1.4550 and then you decide to close the trade.

Therefore the new quote for the USD/CHF will be 1.4550 / 1.455. As now you are closing the trade which

means you will now sell in order to close the trade therefore you will take the second 1.4550 price. Which is the

price other traders are prepared to buy at.

The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

Using the formula from before, we have (.0001/1.4550) x $100,000 = $6.87 per pip x 20 pips = $137.40

Note, when you place a trade you are subject to spread which is the bid / offer price.

You will open a buy trade based on offer price and when you place sell trade it would be based on bid price.

To summarize when you buy to enter a trade you pay the spread but not when you exit the trade. Same is true

with sell, when you sell to enter a trade you pay the spread but not when the sell trade is closed.