Calculating Profit and Loss

For ease of use, most online trading platforms automatically calculate the P & L of a traders' open positions in real-time. However, it is useful to understand how this calculation is formulated:

Approximate USD values for a one (1) pip move per contract in most traded currency pairs are as follows, per 100,000 units of the base currency:

On a typical day, liquid currency pairs like EUR/USD and USD/JPY can fluctuate a full point (.0100, 100 pips). On a EUR 1'000'000 position a full point on EUR/USD equates to 10'000 USD.

To illustrate an FX trade, consider the following two examples.

Let's say that the current bid/ask for EUR/USD is 1.4616/19, meaning you can buy 1 euro for 1.4619 or sell 1 euro for 1.4616.

Suppose you decide that the Euro is undervalued against the US dollar. To execute this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

So you make the trade: to buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.46190). Remember, at 1% margin, your initial margin deposit would be approximately $1,461 for this trade.

As you expected, Euro strengthens to 1.4623/26. Now, to realize your profits, you sell 100,000 Euros at the current rate of 1.4623, and receive $146,230

You bought 100k Euros at 1.4619, paying $146,190. Then you sold 100k Euros at 1.4623, receiving $146,230. That's a difference of 4 pips, or in dollar terms ($146,190 - 146,230 = $40).

Total profit = US $40.

Now in the example, let's say that we once again buy EUR/USD when trading at 1.4616/19. You buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619).

However, Euro weakens to 1.4611/14. Now, to minimize your loses to sell 100,000 Euros at 1.4611 and receive $146,110.

You bought 100k Euros at 1.4619, paying $146,190. You sold 100k Euros at 1.4611, receiving $146,110. That's a difference of 8 pips, or in dollar terms ($146,190 - $146,110 = $80).