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How to Calculate Profit and Loss?
So now that you know how to calculate pip value and leverage, let us look at how you
calculate your profit or loss.
Let us buy U.S. dollars and Sell Swiss francs.
The rate you are quoted is 0.9268 / 0.9272. Because you are buying U.S. dollars you will
be working on the “ask” price of 0.9272, or the rate at which traders are prepared to sell.
So you buy 1 standard lot (100,000 units) at 0.9272.
A few hours later, the price moves to 0.9292 and you decide to close your trade.
The new quote for USD/CHF is 0.9292 / 0.9296. Since you are closing your trade, and you
initially bought to enter the trade, you now sell in order to close the trade so you must take
the “bid” price of 0.9292. The price traders are prepared to buy at.
The difference between 0.9272 and 0.9292 is .0020 or 20 pips.
Using our formula from before, we now have (.0001/0.9292) x 100,000 = $10.76 per pip
x 20 pips = $215.20
Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer
quote. When you buy a currency, you will use the offer or ask price and when you sell, you
will use the bid price.
When you decide to close a position, the deposit that you originally made is returned to
you and a calculation of your profits or losses is done.
This profit or loss is then credited to your account.
What is even better is that, with the development of retail Forex trading, ACM Gold now
allows its traders to have custom lots. This means that you do not need to trade in micro,
mini or standard lots!
This helps tremendously to get the correct risk reward ratios. There is always a balance
between how much risk a customer should be prepared to trade compared to how much
he is investing.
A beginner customer should always use a stop loss, and a novice trader should not be
trading more than 1 mini contract per $1000 capital invested at any given point of time
in the market. This means if a 30 pip stop loss is hit, this equals $30 which is 3% of the
traders account.
So as an example, if you invest $8000 on the market, then you should not be exposing
more than 8 mini contracts at any point in time. You could do 1 full trade of 8 mini contracts
or chose to trade 2 trades with 4 mini contracts each, but the point is that you should not
breach.
Advanced and professional traders can normally afford to double this rule by trading a
maximum of 2 mini contracts per $1000 capital invested.
We are now finally at the point where we can consolidate our understanding, of how we
can make profits or loss on the Forex market, no matter whether we chose to buy or sell
a currency pair.
To truly gain a good understanding, we have broken the explanations into different
scenarios as to whether the US Dollar is the base or quote currency, whether we bought
or sold a currency pair and naturally if we made a profit or loss on each scenario by using
standard, mini or micro lots.
Do not forget to remember that what you earn per pip can either be a fixed value, e.g. $10
per pip for standard lots if the USD is the quote currency, or it can fluctuate all the time
according to the exchange rate if the USD is the base currency. Refer to these calculations
in a previous explanation above if you do not recall this, but it an essential part of knowing
what you make
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