First of all, if you’re using a broker on Forex, then you already have a platform that is automatically calculating all of your profit/losses. In today’s world of automatic information, however, it is still meaningful to have at least a basic idea of what is going on. It can help you get a feel for what is really happening, and it is also pretty easy to understand.
There are two extremely basic formulas to employ.
When you are dealing with USD as the quote currency and the other in a pair, follow this formula:
Your profit is equal to the change in the price of the number of Pip units traded.
Stated differently:
Price difference in Pips X Units Traded = profits
With USD as the base currency, you want to follow this formula:
Price Change in Pips X Units Traded / Exit Price = Profit
We can now try out these formulas to give you a better picture.
Let’s start with USD as the quote currency. For the sake of simplicity, let’s set the brokers margin at 1%. Now you can work with $100,000 for a $1,000 margin.
We’ll begin with a EUR/USD analysis, and we’ll say it the current rate is 1.3625/9. For whatever reason, you are under the impression that the euro might increase against the dollar, so you buy up Euros. While doing so, you will at the same time be selling your dollars.
So you have now just bought $100,000 at 1.3625. Don’t forget that you are purchasing and that you are required to take the asking price listed as the second of the two quoted numbers
The prediction comes true, and you see it increase to 1.3635/3. You set up another trade and sell your EUR in exchange for USD. Now you are working with the bid price.
So you made your purchase at 1.3625and your sale at 1.3635, with a profit of 10 pip. We can now take the formula above and convert this into real money.
Price Difference in Pips X Units Traded = Profit
0.0010 X 100,000 = $100.00 Profit
One rule of thumb to keep in mind is that if you trade a traditional sized trade, say a hundred thousand of a pair where USD is listed as the quote currency, the pip will have to come out to $10. Thus, with 10 pips, you have $100.
With USD as the base currency, we have to follow a different formula. Let’s go ahead and buy 100,000 USD/JPY at 118.33. Good news! The prices increases and let it go at 118.44. Do the math. It comes out to 10 pips.
Using the formula:
Price Change in Pips X Units Traded / Exit Price = Profit
.10 X 100,000 / 118.33 = $84.51 Profit
Not bad, huh?
