How Do I Calculate Profits and Losses

Now that you know how forex is traded, it’s time to learn how to calculate your profits and losses. When you close out a trade, take the price (exchange rate) when selling the base currency and subtract the price when buying the base currency, then multiply the difference by the transaction size. That will give you your profit or loss.

Price (exchange rate) when selling the base currency – price when buying the base currency x transaction size = profit or loss

Let’s look at an example.

Assume you buy Euros at $1.2178 per Euro and sell Euros at $1.2188 per Euro. The transaction size is 100,000 Euros. To calculate your profit or loss, you take the selling price of $1.2188, subtract the buying price of $1.2178 and multiply the difference by the transaction size of 100,000.

($1.2188 – $1.2178) x 100,000 = $0.001 x 100,000 = $100

In this example, you would have a $100 profit from this transaction.

Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros at 1.2180, you will have a $100 loss.

($1.2170 – $1.2180) x 100,000 = – $0.001 x 100,000 = – $100

Let’s try it again using a different currency.

Assume you buy British pounds at $1.8384 and sell them at $1.8389. The transaction size is 10,000. What is your profit or loss?

By following the formula we discussed earlier, you should be able to determine that you would see a $5.00 gain from this transaction.

($1.8389 – $1.8384) x 10,000 = $0.0005 x 10,000 = $5.00

You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought 100,000 Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50.

($1.2173 – $1.2178) x 100,000 = –$50

Similarly, if you sold 100,000 Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.

($1.2170 – $1.2165) x 100,000 = $50

Let’s try it again using a different currency.

A speculator with $500,000 wants to buy Canadian dollars when the spread is 1.1957/62. The position is offset when the spread is 1.1862/66. What will be the result?

In this case, our speculator sold US dollars and received Canadian dollars. As a result, the speculator received 1.1957 Canadian dollars for each US dollar (the bid price, or the price at which the dealer would be willing to sell Canadian dollars for US dollars). The speculator received 597,850 Canadian dollars (1.1957 x 500,000). Subsequently, the value of the US dollar depreciated against the Canadian dollar. The speculator bought 500,000 US dollars and sold Canadian dollars for 1.1866 (the dealer ask price) and paid 593,300 Canadian dollars. The speculator still had 4,550 Canadian dollars, which represents his profit. However, before you can answer the question, you must convert Canadian dollars into US dollars.

To solve this problem, you need to find out how many US dollars it takes to buy 4,550 Canadian dollars. When the speculator reversed the long Canadian dollar position, it took him 1.1866 Canadian dollars to buy one US dollar; so to find his profit, the speculator can simply divide the Canadian dollar profit (Canadian 4,550) by 1.1866 Canadian dollars per US dollar. The result is $3,834 US dollars.

You can also calculate your unrealized profits and losses on open positions. Just substitute the current bid or ask rate for the action you will take when closing out the position. For example, if you bought Euros at 1.2178 and the current bid rate is 1.2173, you have an unrealized loss of $50.

($1.2173 – $1.2178) x 100,000 = – $0.0005 x 100,000 = – $50

Similarly, if you sold Euros at 1.2170 and the current ask rate is 1.2165, you have an unrealized profit of $50.

($1.2170 – $1.2165) x 100,000 = $0.0005 x 100,000 = $50

If the quote currency is not in US dollars, you will have to convert the profit or loss to US dollars at the dealer’s rate.

Let’s look at an example using a USD/JPY spread. If you lost 50,000 Japanese yen on the transaction and the dealer’s rate is $.0091 for each yen, what is your loss in dollars?

By multiplying the transaction size (50,000) by the dealer's rate ($.0091), you will find that your loss is $455.

50,000 x $.0091 = $455

Further, if the dealer charges commissions or other fees, you must subtract any dealer commissions or other fees from your profits or add them to your losses to determine your true profits and losses. Also, remember that the dealer makes money from the spread. If you immediately liquidate your position using the same spread, you will automatically lose money.