The forex market is a currency market that operates 24 hours a day with trillions of dollars being traded daily. Different currencies are exchanged with the motive of making forex profit. The major factors that encourage speculators to buy or sell in the forex market include leverage, liquidity, and easy accessibility. Trading in the foreign exchange market always takes place in currency pairs.
For instance, you buy Japanese YEN in exchange for US Dollars or sell Swiss Francs for Canadian Dollars. Due to changes in the forex rate or currency exchange rate, the value of your forex investment keeps fluctuating. Factors affecting the currency exchange rates include economic and political events.
Tips to Calculate Forex Market Profit and Loss
As a wide range of currencies are traded in the forex market and traders buy and sell contracts of different sizes, the calculation of forex profit and loss may seem like an intimidating task. However, profit and loss in the forex market can be calculated through the following simple steps:
Identify the Size of Contract
There are 100,000 units of the base currency in a standard forex contract. For instance, one contract involving a pair of CHF/USD denotes 100,000 CHF measured in US Dollars. A mini contract is ten times smaller than a standard size contract and denotes 10,000 units of the base currency.
Obtain the Pip Value
When the US Dollar is the second currency in a currency pair, the value of a pip is $1 in a mini contract and $10 in a standard contract. In such a case, for a mini contract, you can find the forex profit or loss through the summation of the number of pips. For a standard contract, the number of pips is multiplied by 10 to calculate the forex profit or loss.
When the base currency is the US Dollar, finding profit or loss requires more calculations. Find out the difference between prices at the entry and exit and divide the resulting figure by the exchange rate to obtain forex profit or loss in Dollars. For instance, if you buy a standard USD/CHF contract at the rate of 77 and exit the trade at 77.35. In this trade, you gained .35 x 100,000 = 35,000 CHF. To convert this figure into Dollars using the latest market rate, you get 35,000/77.35 = 452.49, which is your forex profit in this trade.
Like stocks and mutual funds, forex trading also involves the risk that occurs due to fluctuations in the forex market. Due to the high risk involved in forex trading, the returns are also generally higher. A trader should balance security and risk to his comfort level to achieve his short- and long-term financial goals.