Most online forex brokers you pick will have a trading platform that can automatically calculate your profit and loss. However, you should still understand what goes on behind the calculations. You'll be able to keep tabs on your broker's honesty that way, but you'll also have surer footing yourself as a trader if you know all of the fine details behind those calculations you depend on so much.
Profit and loss calculations are relatively simple. You just need to remember two basic formulas.
When the US dollar, also known as USD, is the "quote currency," or the second of the paired currencies, the formula is:
Profit = Price Change in Pips Times x Units Traded
When USD, or US currency, is the base currency or the first currency in a pair, the formula is:
Profit = Price Change in Pips x Units Traded / Exit Price
As an example to illustrate this, let's use the following scenario. USD is the quote currency and we will also say that the broker requires 1% margin. This means that you can trade $100,000 in currency for only $1000.
Therefore, if you are looking at EUR or USD, currently trading at 1.2518/9, you predict that the euro will rise in value against the US dollar. Therefore, you execute a trade to buy euros and simultaneously sell US dollars.
Therefore, you buy $100,000 worth of units at 1.2519. Remember that you have to take the asking price, or the second number in the quote.
If your calculations are correct and the price rises to 1.2532/3, you initiate a trade to sell euros and buy US dollars. For this trade, use the bid price, which is 1.2532.
Since you bought at 1.2519 and sold at 1.2532, you profit was 17 pips, or 0.0017. To convert that into real money, we use the formula above, so that it looks like so:
Profit = Price Change in Pips X Units Traded
Which means:
Profit = 0.0017 X 100,000 = $170.
In other words, you made $170 on that trade. If you trade $100,000 in a currency pair with the US dollar the quote currency, a pip will be worth $10. 17 pips equal $170.
When the US dollar is the base currency, let's say you buy 100,000 units of USD/JPY (Japanese yen) at 117.22. The price goes up and you sell at 117.35. Therefore, you just made 13 pips.
To calculate what your profit was, use the second formula:
Profit = Price Change in Pips X Units Traded / Exit Price
Which means:
0.13 X 100,000 / 117.35 = $110.78.
So as you can see, this is relatively simple once you get the hang of it.
Yes! It is possible and easy to profit whether stocks are up, down or sideways using option trading. If the ability to trade all kinds of market conditions is the doorway to becoming a stock market millionaire, then option trading would be the very key.
In this article, I will outline some common ways by which you can profit from all kinds of markets by option trading. For more free option trading information, you may wish to visit www.OptionTradingPedia.com.Simple Option Strategies for Up MarketsBuy Call Option - You could buy the same number of equivalent stocks for a fraction of the price using call options and profit when the stock goes up. If the stock should crash, you will lose only the small amount you put towards buying the option instead of the whole amount that you would have put towards buying the stock itself.
Sell Naked Put Option - Instead of buying call options, you could sell short put options thereby pocketing the entire amount you made on selling the put options if the stock should go up. Bull Call Spread - A bull call spread consists of buying call options at the money and selling short out of the money call options of the same month. The benefit of this strategy is that you profit when the stock goes up and profit also when the stock stays sideways!
Simple Option Strategies for Down MarketsBuy Put Option - Instead of shorting stocks and risking a margin call, you could simply buy a put option. Buying a put option is exactly the same as buying call options except that you profit when the stock goes down instead of up.Sell Naked Call Option - Instead of buying put options, you could sell short call options thereby pocketing the entire amount you made on selling the put options if the stock should go down.
Bear Put Spread - A bear put spread consists of buying put options at the money and selling short out of the money put options of the same month. The benefit of this strategy is that you profit when the stock goes down and profit also when the stock stays sideways!
Simple Option Strategies for UP or DOWN MarketsStraddle - A straddle consist of buying a call option and a put option at the same strike price on the same stock. This strategy allows you to profit whether the stock moves up or down and is excellent when you are certain that a stock will move greatly soon but isnt sure which direction that may be.Strangle - Similar concept to a straddle but buys out of the money call option and put option instead of at the money ones in order to reduce the cost of the position.
Simple Option Strategies for Sideways Markets - Covered Call - If you are holding on to a stock that is moving sideways, you could collect "rental" out of it by selling the call option of that stock month after month and pocket the whole amount of the sale should the stock remain sideways.
Short Straddle - Instead of buying call options and put options as described above in a Straddle, you would sell short them instead. In this way, you create an option position which profits when the stock remains sideways.
Are you amazed now at how easy it is to profit in any kind of market conditions by option trading? These are only very few of the many more option trading strategies that you can use to your specific portfolio needs. To learn more about what option trading and stock options are for free, please visit www.OptionTradingPedia.com.
Both Amar Mahallati & Jason Ng are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Amar Mahallati has sinced written about articles on various topics from Travel and Leisure, Family and Family Travel. Visit to find more great information about. Amar Mahallati's top article generates over 110000 views. to your Favourites.
Jason Ng has sinced written about articles on various topics from Finances, Investments and Trading Strategy. Jason Ng is the Founder of Masters O Equity Asset Management. He is a fund manager specialising in options trading and his Star Trading System has helped thousands. For Free Option Trading Knowledge, please visit. Jason Ng's top article generates over 301000 views. to your Favourites.