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Calculating Profits and Losses in Forex Trading.

May 24, 2017 by  
Filed under Money/Business, Weekly Columns

( The success or failure of a trader is measured by profits and losses on their trades. While forex trading can be profitable, it is a risky market so traders need to stay on top of their trade positions and their margin balance in their trading account. Any move in price will affect your margin balance with your margin balance reducing if the price moves against you, resulting in less money available to you for trading.

Realized vs Unrealized Profits and Losses

All forex trades are marked to market in real time; however, this calculation shows unrealized profits and losses. These unrealized profits and losses will remain this way until trades are closed. The mark to market value shows the value that the trade would close right now. It is once you actually do sell that the profit or loss will be realized. The margin balance will be increased in the case of profits and it will be decreased in the case of losses. The total margin balance that can be seen in your account is always equal to the initial margin deposit, plus realized profits and losses, plus unrealized profits and losses. This margin balance is constantly changing due to the fact that unrealized profits and losses are market to market and therefore are continually fluctuating as your trade prices constantly change.

How to Calculate Profits and Losses

Calculating profits and losses is not complicated, but in order to be able to do this, you to have information on position size and the number of pips by which the price has moved. Profit or loss is equal to the position size multiplied by the number of pips it moved. To know whether there was a profit or a loss, we need to know if we were in for a long or a short for each trade.

Let’s look at an example:

Let’s say you have a 100,000 GBP/USD position trading at 1.6238 and the price moves from GBP/USD 1.6238 to 1.6258. This means the price has moved by 20 pips which for your trade position would equal USD 200 (100,000 x 20).

Now we need to determine if it was a profit or a loss.

If it was a long position, if the price moved up, it would be a profit, while if the price moved down it would be a loss. The above example indicated a USD 200 profit because the price moved up from 1.6238 to 1.6258. However, if the price had moved down from 1.6238 to 1.6218, it would have been a USD 200 loss.

If it had been a short position, the price moving up would have indicated a loss, while the price moving down would indicate a profit. In the above example, where it moved up by 20 pips, there would be a USD 200 loss; while if the price had moved down by 20 pips, it would have indicated a USD 200 profit.

Staff Writer; Gary Harris

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