How to Determine the Profits and Losses from Your Forex Trades

EnclaveFX Ltd
Nov 28, 2022


Globally, the forex market has trillions of dollars in daily trading volume. Traders and investors with the right skills and knowledge will find that forex trading offers unmatched opportunities since it was initially designed as a decentralized forex auction house, so the chances are substantial. For forex traders, calculating profits and losses is crucial. Investing in foreign exchange can be difficult, but it can be profitable for the wise investor. It is essential for traders to always be aware of how their positions are doing because of the inherent risk. Undoubtedly, a deal's successful outcome depends on its profit and loss (PandL).

Currency pairs: The basics

Forex trading involves using currency pairs, which represent two different currencies. You can see the current price of a currency pair and the bids and offers of the team by using the Market Watch feature, which shows the current recommendations and offers for the couple. It is included in the auction price, the selling price set by the buyer or merchant. The seller's desire (or the merchant's purchase price) determines the asking price (or just a quotation price). Typically, the spread between the bid and ask price, also recognized as the bid/ask spread, is a measure used to represent the broker's commission. A currency pair of EUR/USD is formed by two currencies, the Euro and the US Dollar. In this context, the US dollar is referred to as the counter or quotes cash. Every currency pair has one base unit. The cost or purchase price in the base currency is substituted for in the quote currency.

Profit and Loss, Realized and Unrealized

Whenever a currency transaction is made, its value is determined by the real-time market value. In a mark-to-market calculation, the realized and unrealized profit is shown. A trade that is unexecuted means it still has the potential to be closed at any time.

A trade can be closed immediately at the market value if it is priced at that level. The open price calculation determines the price at which a long position can typically be sold when you have a long post. Buy at this price to close a short. Liquidation is the only time PandL is realized. In the case of a closed position, the trader can realize a profit or loss. Victories shift margins, and losses decrease them.

Loss and profit calculation

Based on the pip value and position size, you can determine whether you are making a profit or loss from your position. The swap rate and commissions are considered to obtain the precise P/L value.

To decide whether a trade is profitable or unsuccessful, you must know whether you are long or short.

Long Position

It is profitable to hold long positions when the price rises, but it is loss-making to have long positions when the price declines.

Short Position

In a short position, a loss occurs if the price rises; in an extended part, a profit occurs if the price decreases.

Understanding Pip value and position size

For a currency pair, a pip can be translated into one-hundredth of a percent if it represents a movement of one-hundredth of a percent. Four decimal places (0.0001) are usually included in most currency pairs' quotations. We show two decimal places (0.01) for currency pairs in Japanese Yen (JPY).

Forex trading: Profit and loss

Whether you make a profit or a loss on a trade, as long as the position isn't liquidated, there's an unrealized profit or loss (potential profit or loss). Your trading account's profitability can only be determined after closing your position. After that, you can figure out your profit.

The Bottom Line

Every forex broker account calculates profit and loss automatically, so there is no need to perform these calculations manually. Understanding the measures related to income statements and margin requirements is essential before commencing your trading career, especially if you want to construct a sensible portfolio of trades to optimize your profits.