Pips and Lots
Before we dive into calculating profit and loss, it's important to understand the terms "pips" and "lots." A pip is the smallest unit of measure in forex trading, and it represents the fourth decimal place in a currency pair. For example, if the EUR/USD currency pair moves from 1.2000 to 1.2001, that's a one pip move.
A lot is the standard unit size of a forex trade. In the forex market, the standard lot size is 100,000 units of the base currency. However, there are also mini lots (10,000 units) and micro lots (1,000 units) available for traders.
Calculating Profit and Loss
To calculate profit and loss in forex trading, you need to know the size of your trade, the exchange rate of the currency pair, and the number of pips the currency pair has moved.
Let's say you bought 1 standard lot of the EUR/USD currency pair at an exchange rate of 1.2000. The value of one pip for a standard lot of EUR/USD is $10. If the currency pair moves up 50 pips to 1.2050, your trade is now worth $500 ($10 x 50 pips). This means you have made a profit of $500.
If the currency pair had moved down 50 pips to 1.1950, your trade would be worth $500 less than what you paid for it, meaning you would have a loss of $500.
Calculating profit and loss for mini lots and micro lots is similar, but the value of one pip changes. For a mini lot of EUR/USD, the value of one pip is $1, and for a micro lot, the value of one pip is $0.10.
Calculating Profit and Loss for Cross Currency Pairs
Calculating profit and loss for cross currency pairs is a little more complex, as you need to convert the profit or loss into your base currency.
Let's say you bought 1 standard lot of GBP/JPY at an exchange rate of 150.00. The value of one pip for a standard lot of GBP/JPY is 1,000 JPY. If the currency pair moves up 100 pips to 151.00, your trade is now worth 100,000 JPY ($1,000). To convert this into your base currency, you need to divide by the current exchange rate of USD/JPY. Let's say the current exchange rate of USD/JPY is 110.00. To convert 100,000 JPY into USD, you would divide by 110.00, giving you a profit of $909.09.
If the currency pair had moved down 100 pips to 149.00, your trade would be worth 100,000 JPY less than what you paid for it, meaning you would have a loss of $909.09.
