Guide for Forex Traders

Forex Lesson: Basic Forex Profit or Loss Formula

The end-goals in money market speculation is realizing profits and, at the same time, keeping one's losses low. That's why a fundamental forex lesson deals with this concept: Profits are earned or losses incurred when a trade is completed and values are complete. So, how is a basic forex profit or loss formula carried out?

Regardless of how one enters a transaction and exits it, basic forex profit or loss formula is a standard before taking into account broker charges and spreads. This amount is calculated by taking the selling exchange rate, subtracting the buying rate, and multiplying the difference by the transaction lot size.

If the product is a positive value, you've earned a profit. But if it is a negative value, you've suffered a loss. So, to augment this forex lesson, let's take a couple of examples and find out if the following speculators have realized a profit or incurred a loss, and by how much as well.

Speculator A opened a position by buying a 10,000 British pound lot at a $1.5874 exchange rate. Speculator A then closed that long position by selling it when the foreign exchange rate was $1.5867.

Speculator B, on the other hand, entered a trade by selling the same lot size of British pounds at an exchange rate of $1.2819. This short position was closed when the exchange rate reached $1.2814.

You'll notice that the aforementioned speculators opened a position differently, and consequently, closed it differently as well. But as mentioned earlier, regardless of how a trade was completed, the basic forex profit or loss formula remains. So, how do you think these traders did?

If your answer to speculator A's trade is a $7 loss, that is the exact answer. The forex profit or loss formula of this completed transaction is: $1.5867 - $1.5874 = - $0.0007 x 10,000 lot = - $7 or $7 loss.

If you think speculator B earned a profit of $5, you've got the correct solution. It's because this trade's profit or loss calculation is: $1.2819 - $1.2814 = $0.0005 x 10,000 = $5 profit.

Basic forex profit or loss formula is: exchange rate when speculator sold base currency - exchange rate when speculator bought base currency x transaction lot size. It is earned profit if the quote currency net amount is positive; otherwise, it is a loss. Considering that one can complete a trade by buying and then selling the base currency or by selling and then buying it, one thing still stands -- the forex lesson to be learned is that this simple calculation is applicable to either trade to determine a speculator's profit or loss results before varying dealer charges are taken into account.