Case 1: When deposit currency is the same as quote currency.
Here’s a simplified explanation of a profit and loss (P&L) calculation for a forex trade:
Example: Imagine you’re a trader and you decide to buy the EUR/USD currency pair. You enter the trade at a price of 1.2000 and exit it later at a price of 1.2500. Your trade size is 100,000 units, which is equal to 1 standard lot.
Calculation:
The formula to calculate profit or loss in forex trading is:
Profit/Loss = (Exit Price – Entry Price) × Position Size
- Determine the difference between the exit price and the entry price: Exit Price – Entry Price = 1.2500 – 1.2000 = 0.0500
- Multiply the price difference by the trade size: Price Difference * Trade Size = 0.0500 * 100,000 = $5,000
Result: In this example, your profit or loss (P&L) from the trade would be $5,000. Since the result is positive, it indicates a profit from the trade.
So, by buying the EUR/USD currency pair at 1.2000 and selling it at 1.2500 with a trade size of 100,000 units, you made a profit of $5,000.
Case 2: When deposit currency is different from quote currency.
When the deposit currency is different from the quote currency, you need to consider the exchange rate between the two currencies to calculate profit or loss accurately. Let’s illustrate with an example:
Suppose you’re trading EUR/USD , and your trading account is denominated in AUD (Australian Dollar). Here are the details of your trade:
Example:
- Entry price: 1.07301 (EUR/USD)
- Exit price: 1.09301 (GBP/JPY)
- Position size: 10,000 units (1 mini lot)
- Exchange rate: AUD/USD: 0.64856 (this means 1 AUD = 0.64856 USD)
Let’s calculate the profit or loss in AUD:
FORMULA
Profit/Loss in Deposit Currency = (Exit Price – Entry Price) × Position Size/Exchange Rate
Calculation:
Profit/Loss = {(1.09301-1.07301)×100000}/0.64856
Profit/Loss = {0.02×100000}/0.64856
= 2000/0.64856
= 3083.75 AUD
So, your profit from this trade, when your deposit currency is AUD, would be 3083.75 AUD.
If the result had been negative, it would indicate a loss in AUD.
This calculation accounts for the exchange rate between the quote currency and the deposit currency, allowing you to accurately assess your profit or loss in your account’s currency.
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