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Mastering Forex: How To Accurately Calculate Your Trading Profits

Forex trading is ordinarily a very lucrative venture for many people. Most people who start forex trading hope to make some money through passive income. However, trading in forex can also have numerous losses that could flatline your account. That is why you need to learn to calculate your profits and losses as early as possible when trading in forex.

Calculating profits is one of the most fundamental concepts any forex trader should learn. However, it is surprising that not many people spend time learning about profit calculation. If you want to be a successful forex trader, never underestimate the importance of this concept.

In this article, we will discuss why you need to learn about calculating profits and losses in forex trading. We will also discuss the basic concepts of forex trading you should learn before calculating your profits and losses. Finally, we will discuss the main ways of calculating profits and losses depending on which currency pairs you are trading.

Why Do You Need To Calculate Your Trading Profits

The question of why you need to calculate your trading profits when trading in forex can initially seem evident to you. You obviously need to calculate your trading profits to know how much money you have made in any trade. 

Many trading platforms, such as, enumerate entirely how much you have made or lost during the trading session. But you should learn how to calculate these values yourself if you want to be sure that the values. You get from your brokers are precisely what you have made or lost during a particular trading period. 

Knowing how to calculate your profits and losses is crucial if you want to plan out your trades early in advance. Forex trading is highly speculative. As a trader, you need to have a strategy that helps you understand the likelihood of profits and losses during your trading. If you don’t know how to calculate these profits and losses, you can’t know what you will likely gain or lose if you enter the trading game.

Finally, learning to calculate profits and losses is important for you to learn proper risk management. As you have probably heard time and again, forex trading is very risky. That is why you need to manage risk so you don’t lose more than you can afford. 

Knowing how to calculate your profits and losses can help you understand better how much money to risk in any trade and where to put your stop loss to limit the losses you can make.

Basic Concepts Before Calculating PNL

There are some basic concepts you should be aware of before you start calculating profits and losses when trading in forex. Here are just a few to get you started.

1. Pips

In forex trading, a pip is referred to as the least value in which a currency can move during trading. A currency pip is often recorded to the 4th decimal place in many forex platforms. Recording the pip in such a value is generally accepted so forex trading can be standardized. 

However, there are also fractional pips, such as pipettes, which indicate movement and currency that is lower than the regular pip.

Understanding what a pip is can help you know how much money you have lost or made during a particular time.

2. Lot Sizes

Unlike when trading other commodities such as gold and oil, trading one unit of currency in forex is difficult. This is because many changes in forex are ordinarily minimal and are recorded to the fourth decimal place. Making money trading one unit is virtually impossible. That is why forex is traded in lots. 

A lot is basically the amount of currency you can trade at a particular time. It is normally equal to 100,000 units of currency.

Calculating PNL

Calculating profits and losses is different depending on the currency pairs you are trading and the currency you have deposited into the trading platform. Since you can’t withdraw from the trading platform in a currency that is different from the currency you deposited, you will have to make a few conversions before withdrawal. 

The standard formula for calculating profits and losses in trading forex is lot size x pip value x number of pips you have made. But this depends on whether you have increased or reduced your pips. 

Let’s start with how to calculate your PNL when you are trading a currency pair where the quote is the same as the currency of your account. 

Calculating Your PNL When The Quote Currency Is Same As Your Account Currency

As we had mentioned above, the pip value is always listed in the quote currency. When trading one lot size of the quote currency in this scenario. Where the quote currency is the same as the account currency, the pip value will always be equal to 10. But how do we get that?

To calculate the value of 1 pip for every lot you trade, you need to multiply one lot by one pip. Remember, we had said that one lot is equal to 100,000 units of currency. We also mentioned that one pip is recorded as the least movement of currency to the 4th decimal place. That means that one pip is 0.0001 of currency. 

Thus, 100,000 multiplied by 0.0001 leaves a pip value of 10 for every pip movement. You are probably now asking yourself what this means for your profits and losses. Let’s break that down for you.Related to: Road trip in Washington 

Let’s assume you are trading with a currency pair of GBP/USD, and your trade was long on one lot of this currency pair. That means your prediction was that the value of the currency would increase, allowing you to sell at a higher price in the future. If the currency pair’s value when you entered the trade was 1.4565 and the value after the trade concluded was 1.4575, then there was a change of 10 pips. Thus, the trade was increased by ten pips.

In this case, to calculate your PNL using the formula we shared above, you will multiply 100,000 by $10 (pip value) by 0.0010 (10 pips). This gives a profit of $1,000. If the trade went against you, then you would have made a loss of $1,000.

Bottom Line

Even though most trading platforms calculate profits and losses for you without expecting you to make the calculations yourself, knowing how to calculate profits and losses yourself is crucial for you as a trader. 

Our discussion above has highlighted everything you will need to know about calculating profits. Right from the basic terminology to how you can use the terminology to do the math. 

Most times, your PNL on the trading platform is going to be fluctuating up and down as the currency changes. This is referred to as unrealized PNL. You will have to close your trade for you to get your actual profits and losses. But the calculations remain the same either way.

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