Calculating FOREX Profits and
Losses
,
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.
FOREX currencies are traded in much smaller divisions than cash Whereas the smallest
( 0.01),
division in US cash is the penny $
US currency can be traded on the FOREX in
0.0001.
(
–
divisions of $
This smallest division is called the pip short for Price Interest Point
'
').
(
) 100,000
sometimes just called points
Since currencies are traded in large lots of say $
-
.
small movements in value can generate substantial profits and losses In a lot of
100,000
10
40
(4/10
)
US$
one pip is worth $ so an increase in
pips
of one cent can generate
400.
a profit or loss of $
.
100,000
Currencies are traded in lots of various sizes The standard lot is
units of the
.
. .
.
base currency A unit is the currency name e g one unit of US dollars is the dollar So a
100,000.
standard lot of US currency is worth $
FOREX trades can have lots of various
-
10,000
,
.
sizes a mini lot is
units but the most trades are done using standard lots
.
0.0001
Various currencies have different sized pips The US dollar is expressed in pips of
0.01.
while the Japanese yen is expressed in pips of
The value of a pip depends on the
.
(
)
size of a lot and the currency pair traded Currency pairs with USD as the quote second
( . .
/
)
10
1
currency e g CAD USD always have a pip value of $ per standard lot or $ per mini
.
.
lot A pip value calculator can be used to calculate other currencies
Order Types
.
A trader has at his disposal different types of orders to make FOREX trades A clear
understanding of each type of order is necessary to be a successful
FOREX trader
.
Market Order –
.
is an order to buy or sell at the current market price They can be used to
.
-
enter or exit a trade Market orders should be used with care because in fast moving
markets there may be a difference between the price seen at the time a market order is
.
–
given and the actual price of the transaction This is due to slippage the amount the
.
market moves in the few seconds between giving an order and having it executed
.
Slippage could result in a loss or gain of several pips
Limit Order –
.
is an order to buy or sell at a certain limit They can be used to buy
.
,
currency below the market price or sell currency above the market price When buying
.
,
your order is executed when the market falls to your limit order price When selling your
.
order is executed when the market rises to your limit order price There is no slippage
.
with limit orders
Stop Order –
.
is an order to buy above the market or to sell below the market They are
-
most commonly used as stop loss orders to limit losses if the market moves contrary to
.
-
what the trader expected A stop loss order will sell the currency if the market falls below
.
the point set by the trader
(
) –
-
One Cancels the Other OCO this order is used when placing a limit order and a stop
.
,
loss order at the same time If either order is executed the other is cancelled allowing
.
,
the trader to make a transaction without monitoring the market If the market falls the
-
,
,
stop loss order will be executed but if the market rises to the level of the limit order the
.
currency will be sold at a profit
Example OCO Transaction:
:
Buy
1
/
@ 1.3228 = 132,280
standard lot EUR USD
$
:
Pip Value
1 = 10
pip $
-
:
Stop Loss 1.3203
:
Limit 1.3328
1.3328
1.3203 (
This is an order to buy US dollars at
and to sell them if they fall to
resulting
25
250)
1.3328 (
100
in a loss of
pips or $
or to sell them if they rise to
resulting in a profit of
1,000).
pips or $
Here's another example:
/
The current bid ask price for US dollars and Canadian dollars is
/
1.2152/57
USD CDN
...
1 1.2152
1.2157
1 .
meaning you can buy $ US for
CDN or sell
CDN for $ US
(
)
(
)
If you think that the US dollar USD is undervalued against the Canadian dollar CDN
(
)
.
you would buy USD simultaneously selling CDN and wait for the US dollar to rise
:
This is the transaction
:
Buy USD
1
/
@ 1.2157 = 121,570
standard lot USD CDN
$
CDN
:
Pip Value
1 = 10
pip $
-
:
Stop Loss 1.2147
:
Margin
1,000 (1%)
$
100,000
121,570.
You are buying US$
and selling CDN$
Your stop loss order will be
1.2147,
100.
executed if the dollar falls below
in which case you will lose $
,
/
1.2192/87.
1 1.2192
1.2187
However USD CDN rises to
You can now sell $ US for
CDN or sell
1 .
CDN for $ US
(
),
Because you entered the transaction by buying US dollars buying long you must now
.
sell US dollars and buy back CDN dollars to realize your profit
100,000
/
1.2192,
121,920
You sell US$
at the current USD CDN rate of
and receive
CDN for
121,570.
350
287.19
which you originally paid CDN$
Your profit is $
Canadian dollars or US$
(350
1.2187).
divided by the current exchange rate of
,
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