How to Calculate Forex Profits and Losses

How do I calculate forex profits and losses?

Before you start calculating forex profits and losses, it is always better to know what you’re trading and how forex functions in general. We have written this guide for beginners and veterans to refresh every one of the terminologies commonly used in forex to avoid confusion. 

However, if you think you already got everything you know about the basics, feel free to jump right in below to the PnL section to the Calculation section or to know how to calculate your profits and losses.

Currency pairs

The assets that you will be trading in forex are currency pairs that are always made up of two currencies from two different countries. These pairs are listed in codes such as EUR/USD, GBP/USD, CHF/JPY, and GBP/CAD.

Each code is an abbreviation of the country’s currency and the currency itself. USD stands for the USD Dollar, JPY stands for the Japanese Yen, and the GBP stands for the Great British Pound.

Additionally, every pair follows the same format wherein the base currency, also known as the transaction currency, is the currency code on the left. The quote currency sometimes referred to as counter currency, is the one to its right. As an example, in the pair CAD/USD, the CAD is the base currency while the USD is the quote currency.

This is important to note because you will be making trades based on these currencies, and you must understand the purpose of both currencies involved in forex pairs. The exchange rate of a certain forex pair is calculated by the value of the quote currency needed to purchase or sell the base currency.

Assuming that a trader has 500 USD to spend to go long on EUR/USD. As of now, this currency pair has an asking price of 1.1765. To calculate how much EUR they would have if the trade is executed, you would need to divide the 500 USD by the price needed to purchase a single Euro. The resulting amount would be around 425 Euros.

Alternatively, if the same trader decided to convert their Euros back to Dollars, they would need to multiply their trade amount by the bid price. If the bid price at a later time became 1.1765, their 425 Euros would be converted back to 500 USD without losses. Later, we will be discussing what happens if the ask and bid prices are different after purchasing an asset.

In forex, entering a position is a simultaneous trade of both buying and selling assets. If traders decide to trade EUR/USD by buying lots of it, they essentially buy EUR and sell USD. 

When going long on a currency pair, traders are not always bullish on the base currency itself. Instead, they might have analyzed that the quote currency is either less bullish or more bearish. Alternatively, they might be employing an interest rate strategy wherein they calculate net interest rates, which we will discuss later on.

Pip values

The standardized unit in forex is called a pip, and this is used in calculating spreads and differences in price that heavily influence profits and losses. A smaller version of a pip is called a pipette and is worth 1/10 the value of a pip. Note that the pipette is less commonly found in the forex scene and is only offered by brokers who want to offer more competitive spreads for clients.

Pips are easy to determine in currency pairs as these are usually located in the 4th decimal place. In a currency pair such as EUR/USD, which has an exchange rate of 1.1745, the 5 denotes the pip placement. Additionally, the number next to the pip is always the pipette.

For pairs that involve the Japanese Yen, the pip is located in the 2nd decimal place. Thus a pip in the JPY is worth 0.01 of the currency’s exchange rate.

Pips are relatively small in value compared to the prices of currency pairs, but these small values add up because of margin, leverage, and lot sizes which we will discuss next.

Lot sizes

Lot sizes are the units used in trading forex. The standard lot size is worth 100,000 units of the base currency.

If a trader decides to buy one standard lot of EUR/USD, they will purchase 100,000 Euros by spending an equivalent value of USD. Alternatively, if they buy USD/JPY instead, they will get 100,000 US Dollars in exchange for the equivalent in Japanese Yen.

Some brokers don’t only offer standard lots, but they also offer mini lots that are worth 10,000 units of the base currency and micro-lots which are 1,000 units of the base currency. Aside from these types of lots, a few brokers offer nano lots that are worth 100 units of the base currency.

In forex, lot sizes are important because of the amount of cash you’re dealing with per trade. A single mistake could cost you hundreds if not thousands of pips in losses.

Spreads and swaps

Both spreads and swaps act as a fee for forex traders. Although both are minimal deductions to your potential gains, these add up once unchecked and unmonitored.

Spread is a common term you’ll encounter, especially if you’re actively trading forex pairs. Spread is the difference in pips between the bid and ask prices of the same asset. For example, if a currency pair such as EUR/USD has a bid value of 1.1745 and an ask value of 1.1749, the spread is calculated to be four pips.

Generally, spreads can be calculated by using an asset’s pip value, which is usually on the fourth decimal point. But as discussed earlier, pips for JPY pairs are in the 2nd decimal point, so spreads are likewise calculated by using the 2nd decimal point.

When trading forex pairs, you will notice that spreads for major currency pairs are better and smaller compared to minor and exotic pairs. This is due to liquidity and market participation. Brokers also fight for clients by offering competitive spreads because this ultimately increases traders’ profitability despite the seemingly low value of spreads.

To calculate losses in pips specifically incurred by spreads from your trades, you need to multiply the spread in pips by the number of units in your executed trade. Assuming that you traded one standard lot of EUR/USD with a spread of 5 pips, you will multiply 100,000 units in one lot by 5. With this trade, you have lost 500,000 pips or $50 dollars just from executing this trade.

Swaps, on the other hand, are interest rates that are charged to the trader when they convert or purchase a currency pair. For example, when you would want to buy and go long on EUR/USD, you would need to borrow dollars through your broker and pay the interest rate for the USD. At the same time, you will also earn interest from the Euro that you purchased.

Brokers put out net interest rate data for their customers so that you would know if you will gain or lose money for an overnight position. Using this data could also employ a strategy that solely uses interest rates to profit from the market.

Realized vs. Unrealized P&L

This section will be discussing P&L or profits and losses as a whole and why knowing your historical performance is important. Since all your trades are updated as the market moves, you will be able to see your portfolio’s performance in a certain time frame. These profits and losses can be segregated into two classifications: the realized P&L and unrealized P&L.

Unrealized P&L are the results of your currently open trades since they have been executed. These trades can still be closed, and the money you will get or give back is reflected on the unrealized P&L. 

No matter what directional trade you take or whatever derivative you trade, your unrealized P&L will always show a value that is accurate to its mark-to-market valuation or its current value based on market conditions. Take note that unrealized P&L is sometimes called paper profits or 

Realized P&L, on the other hand, are the gains and losses of your traded asset once the trade has been closed. It is important to note that both realized and unrealized P&L affects margin balance which changes constantly based on market movement.

Calculation of profits and losses

We have divided our guide into a few separate sections that would talk about how to calculate P&L when trading forex pairs as well as how positions with margin and leverage affect P&L.

P&L for the underlying asset

Before anything else, you need to know your historical trades because you’ll be using that data in the calculation. Important things to note include the asset you traded, the value of your traded currency when you opened and closed your trade, the number of lots you traded, and the directional bias of your trade.

The formula for calculating your P&L for long trades is listed below.

(Closing price – Open price) x # of lots x 100,000 units per lot = P&L in the base currency

As an example, let us assume that you decided to go long on EUR/GBP with a two standard lot trade size. Initially, its price when you bought it was 0.88490, and you sold it at 0.88650.

The first thing you should do is to find out how many pips you gained through this trade. By finding the difference between your closing price, which is 0.8865, and the opening price, which is 0.8849, you will end up with a value of 16 pips or 0.0016

You gained 16 pips per lot, and with a total trade value of 2 lots, you gained 32 pips or 0.0032 in trade value in total. You then multiply the units per lot, 100,000, by the change in the currency, which is 0.0032. The resulting amount is 320 units in the base currency which are GBP.

By using the formula, our mathematical equation becomes

(0.8865 – 0.8849) * 2 lots * 100,000 units per lot = 320 GBP

Converting your profits to another currency

Once you’ve gotten the basics of how to calculate your profits and loss, you might prefer to see your results in your chosen currency. This is quick and easy to do.

The formula for this could be one of the two formulas below, depending on what you’re trying to solve.

Amount in quote currency / Forex pair’s exchange rate = value in base currency

Forex pair’s exchange rate * amount in base currency = value in the quote currency

By using the previous example, we are going to convert 320 GBP to EUR. For EUR/GBP, we need to look at the value of the asking price of EUR/GBP because we are looking to convert our funds to EUR. Currently, its exchange price is at 0.8865. We need to divide our amount in quote currency, which is 320 GBP, by 0.8865. The resulting value will be equal to 360 EUR.

By using the formula, our mathematical equation becomes

320 GBP / 0.8865 = 360 EUR

Calculating with margin and leverage

When trading with margin, you do not have to do extra steps when directly calculating profit and loss from a trade. This is because the money you borrowed through your broker has already been accounted for in the number of lots you executed in your trade. However, it is important to know that you might incur additional losses through the interest rate of your borrowed currency.

Leverage, on the other hand, demands special attention because of its added risk to the client. When you’re executing a trade with leverage, you need to pay attention to how much leverage you are using. You simply need to multiply your profit or loss with the leverage multiplier when calculating profits and losses.

Your formula for this is simple.

(Initial P&L * Leverage multiplier) = resulting profit or loss.

If you used 20x leverage and initially incurred a 5% loss, your position will instantly be liquidated because you have essentially hit a 100% loss. Alternatively, if you had a 5% gain immediately after you entered a 20x leverage trade, you would have already doubled your money with a 100% gain.

Using online forex calculators

An easy way to calculate your forex gains and losses is to use a calculator provided by either your broker or a third-party service provider. These calculators are free to use and are usually up-to-date with the latest prices of currency pairs.

To use this tool, you simply need to input your currency pair of choice and the directional trade you took. Then, the appropriate open and close price of the asset should be inputted.

Lastly, you need to provide details on how many lots you traded. Take note that the number of lots in question is usually standard lots. If you traded mini or micro lots, you could divide the lot value by 10 and 100, respectively.

The result will be shown almost immediately once all details have been placed in the calculator. Some calculators even allow you to view your potential profit in your currency of choice.

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