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Well, it's pretty simple really.
If you are serious about being a successful forex trader you need to understand the mathematics behind your trades. Plus it makes sure that you can keep tabs on your forex broker, so you can make sure they are not 'cooking the books'.
As a forex trader, I'd expect you to be numerate, so it should be pretty easy for you to calculate your profits and losses. But I can understand if you are new to forex trading it might not be initially self-explanatory.
The 2 formulae you need to commit to memory.
(In this calculation I'm assuming you are trading in USD.)
When the US Dollar is the second currency (the quote currency), the formula to use is:
1 - Profit is equal to: the price change in PIPs multiplied by the units traded. (e.g. profit = pips price change x traded units)
Secondly if the US Dollar is the first currency in the pair (base currency), the formula to use is:
2 - Profit is equal to: the change in price in PIPs multiplied by the units traded divided by the exit price. e.g. profit = price change in pips x units traded / exit price
So to 'hammer this home' and make sure you really understand this process I want to give you a few examples.
To start with we'll use an example where the US dollar is the second currency, the quote currency, and to make things easy we're going to use a 1% broker margin. So you can trade up to 100,000 USD with only 1000 USD.
OK?
Great. We'll take the EUR/USD which for example is trading at 1.5618/9. Your analysis has led you to predict that the Euro is going to rise in value against the dollar so you start a trade to buy more Euros and sell US Dollars.
So you end up buying $100,000 worth of units at a price of 1.5619 - remembering that you are buying so you have to buy at the ask price - this is the last/second number in the quote (so you buy at the ask price of 1.5619 not 1.5618).
Your predictions turn out to be correct. Congratulations, the price rise to 1.5635/6. So you start another trade to sell the Euros and buy USDs. For this trade you use the bid price as you are selling, which is 1.5635.
So here's where your maths comes in.
As you purchased the Euros at 1.5619 and then sold at 1.5635 your profit is 16 pips, or 0.0016. So before that makes any sense we need to convert that into proper money. So this is where we use our formulae.
Profits = 0.0016 (price change in pips) x 100,000 (units traded) = $160.00
If you are trading standard sized lots of a currency pair as we did above of 100,000, in which you use the USD as the quote currency, a quick rule to remember is that a pip is equal to c.$10. Hence 16 pips = $160.
So let's take another quick example, but this time we'll use the USD as the base currency.
You place a buy order for 100,000 units of USD/JPY at 103.20. The price increases and you sell at 103.33. You just made a quick 13 pips. So to calculate your profit in your second formula:
Profit = .13 (pips) x 100,000 (units traded) / 103.33 (exit price) = $110.78
Easy huh?
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