Useful Tips To Calculate Forex Profits & Losses With Ease
When you get into forex trading for the first time, doing profit and loss calculations with precision can be a challenge in itself since you are trading international currency pairs and want to see the P&L in your account base currency. The difference in the values of currencies will also affect profit and loss calculations. Hence, a beginner must learn the best methods to calculate trading results easily. Today, we will guide you about the same with some tips you can follow for accurate results in trade-related calculations.
Calculate Profits and Losses Considering the Pip Value
Pips are the standard unit of measurement which is commonly used in the forex market for calculating the outcome of a trade. Pip is referred to as the ‘Price Interest Point’ as it denotes the smallest price movements in currency pairs. For every currency pair except the ones with Japanese Yen, the pip value is measured at the 4th decimal; for JPY pairs, it is the 2nd decimal position.
Also, the determining factor for fixed pip value per standard lot is the second currency in a pair which is the currency against which the first or base currency is quoted. For pairs with currencies quoted against the US Dollar, the fixed value is $10 for one standard lot, which is 1,00,000 units of currency. But in the case of pairs where the base currency’s value is stated against GBP as the quote currency, the fixed value will be 10 GBP per standard lot.
Now, the calculation of profits and losses with pip value is based on how much pip the currency pair gains or loses once you enter the trade. Most traders talk about their profits and losses using pips. For instance, a trader may say I won the trade by 20 pips or such. Here, we can assume that the trader made profits equivalent to the value of 20 pips based on the currency pair that they are trading with as well as the base currency of the account.
The calculation can be complex for a beginner; hence, you can take the help of a pip value calculator. An automated pip calculator is an online tool that simplifies pip calculation, giving accurate results within split seconds as soon as you enter the values. Adding such simple yet powerful tools to your toolkit will make the profit and loss calculations error-free and easier for you.
Consider Entry and Exit Prices of a Trade
Just considering pip value may not be enough to calculate your potential profits and losses as the price at which you enter and exit the trade will also be key determinants in the end result. Hence, you must decide the prices at which you plan to open a trade position as well as your exit point for the trade. Your stop loss and take profit levels can be considered exit prices in this regard.
Another aspect that plays a key role in your profitability is the size of your position. The trade size will also determine the amount of risk that you are taking for a trade. So, you must be considering the position size of your trade to calculate the results with precision. The size of your position should be optimal in order to maximise your gains without risking too much.
Now one tool that can help you in calculating profits and losses with due consideration to the entry and exit prices along with the trade size is a forex profit calculator, which is easily available on forex trading platforms for free. This tool considers the prices at which trade is opened and closed together with the trade size in lots and account base currency for profit/loss calculation.
It is recommended that you should find and use such free and beginner-friendly tools to make the calculation process faster and hassle-free. It allows you to try out different trade scenarios by adjusting the prices and trade size, which is ideal for determining the best trade position per your risk tolerance and profit targets.
Displaying P&L in the trading terminal – MT4/MT5
Now, since we have looked at different methods for profit and loss calculation along with some useful tools that you can use to calculate important values, another thing you should also know is the method for checking the P&L in the trading terminal itself for the trades that are running. If you are an MT4 or MT5 user, you can easily check the P&L by looking at the ‘Trade tab’ located in the ’terminal window’.
Usually, the profits and losses will be displayed in the account base currency, but you can also switch it to pips if needed. Just choose the option ‘as points’, and then you will be able to see the live trading results as the number of pips gained or lost. Now, the profits and losses will be unrealised P&L if the trade is still open. The profit or loss will not reflect in your account balance unless and until you exit the trade.
Another key aspect that is related to the final result of a trade is the cost of trading because the cost of the trade will also be reflected in your account along with the profits or losses.
One good thing about MetaTrader is that the profits or losses do not include the cost of the trade, and it is stated separately, making it easier for you to distinguish between the two.
Trading Cost Calculation – The cost of trading has a major impact on your trading account balance; hence, you must consider them while calculating the potential profits or losses. The trading cost is made up of 3 different kinds of costs: spreads, commissions and swaps.
Spreads – Spreads are the difference in bids and ask prices in the forex market, which is a cost you will incur as a trader. The spreads will be dependent on the broker you choose for trading. Most brokers clearly state they charge the spreads on their own platform, which again varies for each currency pair. So, you can refer to the same for calculating the spreads for your trades.
Commission – Commission is another cost that you will have to pay while trading in the forex market. Some brokers provide commission-free accounts but compensate for the same by adding markup to the spreads. Usually, the commission is fixed at a flat rate, and it varies based on the trade size. You can find automated commission calculators on most broker platforms.
Swap or Rollover – Swap or rollover is actually the cost of keeping a trade position open overnight. Because trades that get closed within a day do not have the implication of a swap or rollover fee, but when you carry forward a trade to the next day, the interest rate differences between the currencies in your chosen pair will result in the swap. Swap or rollover is not just a cost, as there are occasions when you earn from it as a trader.
In fact, the carry trading strategy is a classic method that allows you to profit from swaps only. Here, you won’t be paying any swap charges; instead, the broker will credit your account. Now, whether you earn from swaps or pay them to the broker to keep the trade running depends on the currency pair you choose as well as the type of position opened (long or short).
Many broker platforms do provide automated swap calculators, and you can easily use them for swap calculations. Now the only situation where you won’t have to pay a swap is when you trade on a swap-free or Islamic account as a Muslim trader. In this case, the broker will be charging a fixed fee instead, as paying or earning interest is strictly prohibited per Islamic finance rules.
Bonus Tips for Cost Minimisation – For traders who use MetaTrader, they can easily view the swap and commission right beside the profits. Now, one tip I can give you about minimising trading costs is to take time to choose the right broker and pay close attention to the costs incurred during a trade.
Final Words
So, these were the tips for calculating P&L and trading costs with ease using some simple tools. Another thing that I want to add here is that your profitability can be affected by slippage when you engage in live trading. Slippage happens due to increased volatility and lack of liquidity. So, make sure you stay out of the market when there is high volatility and low liquidity, as getting caught up in such a situation will have a negative impact on your profitability.