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Forex Calculation


Although the trading platform automatically does the profit and loss calculation for you in real time, it is important to understand how these equations are derived.


Equations for calculating major currency pairs:

The equation for EUR/USD, GBP/USD, and AUD/USD [direct currency pairs] is as follows:

P / L = ( closing rate - opening rate ) x lot size x number of lots

The equation for USD/JPY, USD/CHF and USD/CAD [indirect currency pairs] is as follows:

P / L = ( closing rate - opening rate ) / closing rate x lot size x number of lots

In a 100,000 units/contract size account, 1 pip results $10 profit/loss in EUR/USD, GBP/USD, AUD/USD, approximately $9 in USD/JPY, and $8 in USD/CHF.

In a 10,000 units/contract size account, 1 pip results $1 profit/loss in EUR/USD, GBP/USD, AUD/USD, approximately $0.9 in USD/JPY, and $0.8 in USD/CHF.

NOTE: Buy = Long = Ask = Offer ; Sell = Short = Bid


Calculation Example:

The current bid/ask price for EUR/USD is 1.2322/1.2325, meaning to purchase every unit of Euro, you need 1.2325 units of U.S. dollar or sell every unit of Euro, you need 1.2322 units of U.S. dollar.

Let's assume that you decide the Euro is undervalued against U.S. dollar. To profit from your strategy, you would buy Euro (sell dollar) at 1.2325. Thus when the price of Euro rises, you would sell Euro (purchase U.S. dollar) for a profit.

You bought 100,000 units of Euro at 1.2325.

Some time later, EUR/USD price is at 1.2355/1.2358 just like you expected. So you decide to sell Euro (puchase U.S. dollar) or close your position for a profit.

In this senario, your profit is 1.2355 - 1.2325 = 30 pips.

Equation:
( 1.2355 [ closing rate ] - 1.2325 [ opening rate ] ) x 100,000 [ unit / lot ] x 1 [ lot ] = $300 [ profit ]

What is Pip/Point?
Pip (or point) is the term used in currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY).

What is Lot Size ?
Lot or Contract is the standard unit of trading on certain exchanges. For example : 10000 (mini account) or 100000 (standard account)

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