Profit and loss is a complicated business with all the pieces parts in FX, or is it? Do not get discouraged because you see a lot of maths or explanations before you truly get to the concept of profit or loss. Any background information you have read so far is just providing the ground work for the simplest calculations you will need to create a proper position in foreign exchange trading. If you have not read the examination of leverage for part one of profit and loss, you might want to do so. The lot sizes with pip value and leverage explanations were given to help you arrive at the information you need to calculate profit and loss.
FX Pip Value and Leverage
In order to calculate profit and loss for a currency pair you need to understand the amount of leverage you have on the account and how much a pip is worth when it changes. If you see the FX rate of 1.4525/1.4530 you know a couple of things for the currency pair, which we will say is the AUD/USD for the example. The first is that there is a 5 pip spread for the transaction. You want to buy a standard lot of 100,000 at 1.4530.
The price after an hour moves to 1.4550. The difference in the two rates is .0020 or 20 pips. Since you did the pip value calculation you know that the USD with a standard lot size is equal to $10. So for every pip the rate moves you make $10. If you have 20 pips in which one is equal to $10, then you made $200 because you take the value and multiply it by the pips.
Right now you are thinking that was pretty easy for the profit calculation, right? It is now that you have learned all the FX pieces parts. The fact is you can use calculators, charts, and apps to help you with the pip value and then find the profit. You may not need the pip value if you use a profit and loss calculator. It will depend on the site you have chosen for your broker or forex tools. There are certainly plenty on the market.
FX Profit and Loss: How to Find Loss
You know how to find profit in FX. Yet, how do you find any loss you might sustain? It is another easy answer and you have just learned it. If the above example moved from 1.4530 to 1.4510 and you bought in to the currency pair thinking the AUD would gain, then you sustained a -.0020 or negative 20 pips. You lost $200 instead of gaining it. You need to use the calculation based on the position you opened and the rate movement. If the rate moves against your position then it is a loss. If it moves in the same way as your position then it is a gain for you. FX is only complicated if you jump in feet first without testing the waters and gaining proper education.