Forex Calculation – Get Your Math Right

How do you calculate profit or loss in a forex transaction?

If you know the formulae then there is nothing like it. But if you are dependent on your forex brokers or trading platforms to do the calculations, then our advice to you is do by yourself these calculations first.

Calculating profit or loss in a forex transaction involves a standard procedure, and is indeed quite simple. Two formulae that you need to get by heart and you can emerge a winner of the game.

The first of the currency pair is called the base currency and the other is known as quote currency depending on the nature of transaction. For example, if you are using USD as your first currency then that is the base currency then all you need to calculate your profit is to multiply the price change with the units traded and then dividing the product by the exit price. Similarly, if you are using USD as your second currency of the currency pair, that is the quote currency, then calculate your profit by multiplying the price change with the number of traded units.

So put the values in the right place and do the necessary calculations, including the division and the multiplication to arrive either at a positive figure that implies a profit or a negative number implying a loss.

For easy understanding we arrive at an answer using the formula we just learnt.

Profit scenario

Assume that the broker has a margin of 2%.

Trading done with USD as the base currency that is for example USD/JPY.

The base price is 112.77.

The number of units bought at this price is 100,000.

Supposing the price went up, say to 112.94, the profit made is 17 cents.

How does one arrive at this figure?

It would be (100,000 X 0.17)/112.94 and the resulting profit comes to $150.52

A loss scenario

We apply the same formula in a situation where price has come down to 112.59

Here there would be a loss of 18 cents.

To arrive at the exact loss amount, the equation is,
(100,000 X (-0.018))/112.59 which equals to $159.87 as loss amount.

We now apply a real life situation to check the second formula wherein you are using USD as the quote currency. The situation reflects trading EUR/USD at 1.2467/8.

You decide to buy Euros and then sold them at 1.2671/2, the calculation looks like (100,000 X 0.0023), resulting in profit amount $230.

So, if you are equipped with the knowledge of doing these calculations, you got some idea of forex trading. Because it is wise to recheck and recalculate your broker’s calculations so you arrive at common figure. This means you know that your broker is trustworthy and reliable. This also means you can also audit your own earnings if any mistakes become apparent.

In short, knowledge never goes to waste; every little bit of knowledge gained will benefit you in the long run. It will benefit you even more so in markets like forex trading, where the market is quite volatile and a single cent can reflect a significant loss or profit.