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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