How to Calculate Profit in Forex?
Forex market is a place where you can earn profits despite of the price trend. Trader can make profit when the price increases and when the price decreases. There are two choices when a trader decides to open a position. Traders either buy a currency pair at ask price when he/she thinks the price of the currency pair will increase or sell a currency pair at bid price when he/she thinks the price of the currency pair will decrease. When the price of a currency pair increases, the base currency is becoming relatively stronger than the secondary currency. When the price of a currency pair decreases, the base currency is becoming relatively weaker than the secondary currency.
For instance, let’s consider EUR/USD 1.4620/1.4622
- Base Currency = EUR
- Secondary Currency = USD
- Bid Price = $1.4620
- Ask Price = $1.4622
- 1 pip = 0.0001
- Spread = 2pips
- Leverage = 200:1
Buying a Currency Pair During Uptrend Market
Assume that base on your analysis, you think the price is most likely to go in an uptrend direction. You buy a mini lot ($10,000) of EUR/USD at the ask price of $1.4622. The ask price is 2 pips higher than the actual market price. The price that your broker quotes to you is equal to the ask price. It will be 2 pips higher than the actual market price when you buy a currency pair where 2 pips is the spread of this currency pair. In this case, you are actually buying $1x$10,000=$10,000 of EUR in exchange of $1.4622x$10,000=$14,622 of USD with $10,000/200=$50 (USD) of margin. However, the actual market price is only $1.4520 when you hit the buy button. If you close your position immediately by selling your $10,000 of EUR back to the market at bid price of $1.4620, you only get back $14,620 of USD. This results an immediate loss of $14,620-$14,622=-$2 (USD). Now you have $10,000 of EUR in your hand. You wait patiently for the price to increase. When the actual market price increases to $1.4630, you close your position by selling the $10,000 of EUR in your hand in exchange of $1.4630x$10,000=$14,630 (USD). Therefore, your profit will be $14630-$1.4620-$2=$8 (USD).
Selling a Currency Pair During Downtrend Market
Assume that base on your analysis, you think the price is most likely to go in a downtrend direction. You sell a mini lot ($10,000) of EUR/USD at the bid price of $1.4620. The bid price is equal to the actual market price. The price that your broker quotes to you ($1.4622) will be 2 pips higher than the actual market price when you sell a currency pair where 2 pips is the spread of this currency pair. In this case, you are actually selling $1x$10,000=$10,000 of EUR in exchange of $1.4620x$10,000=$14,620 of USD with $10,000/200=$50 (USD) of margin. However, the actual market price is $1.4520 when you hit the sell button. If you close your position immediately by buying back your $10,000 of EUR from the market at ask price of $1.4622, you will need to pay $14,622 of USD. This results an immediate loss of $14,620-$14,622=-$2 (USD). Now you have $14,620 of USD in your hand. You wait patiently for the price to decrease. When the actual market price decreases to $1.4610, you close your position by buying back the $10,000 of EUR from the market by only paying of $1.4610X$10,000=$14,610 (USD). Therefore, your profit will be $14620- $1.4610-$2=$8 (USD).
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