Forex Trading Calculating Profit

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Written by Book Reviews

The forex currency trading is to exchange one currency for another in the expectation that the rates or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, then you must sell the currency back in order to lock in the profit.

Let's assume that you open a long position by buying USD/JPY for 107.58 (quantity of 100000) and few hours later, you close the deal by selling USD/JPY for 107.74 (quantity of 100000).

These two trades would bring you profit of (107.74 - 107.58) * 100000 = JPY 16000 (JPY is the counter or quote currency in the USD/JPY pair).

You can than convert the profit to a currency you like, for example JPY 16000 = 16000 / 107.74 = USD 148.51.

We are able to say that these two trades would bring you 16 "pips" profit.

A "pip" is the smallest increment in any instrument.

For asset types other than forex, the smallest increment is often called "tick". In EUR/USD one pip is 0.0001, in USD/JPY one pip is 0.01.

Expressing position profits in pips is often very useful for quick calculations and estimates.

One pip, from the example above, it would bring you 0.01 * 100000 = JPY 1000 profit, or JPY 1000 = 1000 / 107.74 = USD 9.28.

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