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As we all know Forex trading basically involves buying and selling of currency pairs. But what most of the people out there do not know is the correct way of calculating the amount of profit or loss from a trade executed in the forex market. This article is aimed at educating people on how to calculate the amount of profit or loss from a closed forex position.
For the purpose of this discussion, we are going to take an example of the YEN/USD currency pair. Let us assume that the current ask/bid price for YEN/USD pair is 17.5240/45. The meaning of the above statement is that you can buy 17.5245 Japanese Yen for every US dollar spent and in the same way by selling one Yen you would get 17.5240 US dollars.
Let us further explain the method of calculating profit or loss. Suppose that now you want to buy Yen and go ahead and buy a lot of 100,000 Yen by spending US dollars and wait for an appreciation in the price. Now let us suppose that after waiting for some time the value of the Yen rises to17.5287/90 against the US dollar. Now selling in such a situation would get you 1,752,870 Yen for your 100,000 US dollars.
When we take a look at the buy price and the sell price, it can be seen that there is a difference of 42 pips. This means that on the overall transaction you have earned a profit. If in the same transaction if the value of the Euro went down, you would be very easily able to calculate the amount of money lost in the trade and thus use this calculation to safeguard yourself from losing money in the future.
The above method is very simple to use and can be easily scaled up for calculations concerning a large number of transactions. In fact, it is so simple to use that even a 5th-grade student can use it to calculate the amount of profit gained or loss incurred.
Thus the method is perfect for those who need to ensure that they are executing profitable trades without having to fuss around with complex methods of profit or loss calculation. The same method can be applied to your overall trade session also. This can be very easily done by first calculating the total number of pips that you have gained or lost and then taking into account that gain or loss to find out the amount of money overall profit or loss.
