Online forex trading offers number of distinct advantages. Besides real time rates, your profit and loss is calculated on real time basis by the forex trading software and is displayed live online. Even though this is an important advantage in forex trading account but I strongly recommend that you must be aware about the methodology to calculate your profit and loss from forex trading.

Basically there are two straightforward rules for calculating your profit and loss from forex trading:

1. Rule No.1: Whenever the quote currency (second currency) is USD, you can calculate the profit and loss in USD terms by multiplying the number of Pips with 10 USD if the lot size is a standard lot of 100,000. Similarly in case of mini lot of 10,000, the profit and loss from forex trading can be calculated by multiplying the number of Pips with 1 USD.
2. Rule No.2: In case of quote currency other than USD, the profit and loss will be calculated by dividing the number of pips with the exchange rate and then multiplying the result with lot size.

Let us discuss few factual examples on how to calculate profit and loss from forex trading. I have illustrated three examples – one example with USD as the quote currency and two examples with JPY as the quote currency. For simplicity only Long trades (Trades where you buy first and then sell) are considered. The lot size is assumed as standard lot of 100,000 and lot quantity is taken as 1 Lot.

Calculation of Profit and Loss for EURO/USD Trade:

• Buy trade executed at 1.5555 and sell trade executed at 1.5560.
• Profit/Loss = 1.5560 – 1.5555 = 0.0005 OR 5 Pips.
• Since the quote currency (second currency) is USD, profit and loss in USD terms = 0.0005 x 100,000 = 50 USD ALTERNATIVELY profit and loss = 5 Pips x 10 USD =50 USD
• If you are a trader from EURO zone and you wish to calculate your profit and loss in EURO terms then you need to apply basic math. Divide your USD profit and loss by the exchange rate i.e. 1.5560. It works out to 50/1.5560 = 32.13 EURO. This point has been explained just for the academic interest as all the forex trading brokers display your profit and loss in USD terms.

Calculation of Profit and Loss for USD/CHF Trade:

• Buy trade executed at 1.0473 and sell trade executed at 1.0488.
• Profit/Loss = 1.0473 – 1.0488 = 0.0015 OR 15 Pips.
• Since the quote currency (second currency) is CHF (other than USD), profit and loss in USD terms = 0.0015/1.0488 x 100,000 = 143.02 USD.

Calculation of Profit and Loss for USD/JPY Trade:

• Buy trade executed at 108.09 and sell trade executed at 108.30.
• Profit/Loss = 108.30 – 108.09 = 0.21 OR 21 Pips.
• Since the quote currency (second currency) is JPY (other than USD), profit and loss in USD terms = 0.21/108.3 x 100,000 = 193.91 USD.

Wrapping up

Well-timed locking of your profit and booking of your loss in foreign currency trading is the most important trait for being a successful forex trader. Hence the knowledge of how to calculate profit and loss from forex trading plays a very important role in flourishing the online forex trading business.

In your forex trading education, after learning (1) Reading and understanding quotes (2) Pips and valuation of pips and (3) Calculation of profit and loss, next most important topic should be types of orders.

Like stock trading and commodities trading, there are different types of orders in forex currency trading. Proper understanding of types of orders lays the foundation stone for achieving success in forex trading.

If you start online forex trading without an insight into how, when and what types of orders should be placed with your forex trading broker or on the forex trading platform, your entire profit and loss and the balance sheet of online forex trading business can go red.

Orders are basically categorized under two parameters – price and duration:

Orders with Price Variable:

1. Market Orders: This is the most basic and simplest type of order. The order is executed at the current market price. In this order you buy or sell immediately at the best available price. If you are trading through online forex trading software with your high speed broadband internet connection then the order is executed almost instantly.
2. Limit Orders: In limit order you can specify the limit price – upper limit for buy order and lower limit for sell order. Limit order is used by the forex traders for entering a new position or exiting the open position.
3. Stop or Stop-Loss Orders: Stop order is akin to limit order but stop order is used for entry or exit at a price that is pre-determined as per support and resistance levels on the technical chart. Stop orders are essentially used as an effective tool to curtail the losses or for protecting the profit (trailing stop loss). Stop orders are favorites for forex traders who trade aggressively based on the break out on the chart.
4. OCO – Order Cancels Other: In OCO order you place two orders simultaneously. One order is placed above the current price and the other order is placed below the current market price. As soon one order gets executed the other order is cancelled.

Orders with Duration Variable:

1. GTC – Good Till Cancelled: GTC orders can be placed with limit orders or stop orders. The order remains in the forex trading system till it is cancelled by the trader. It is the responsibility of the trader to cancel this order as per his judgment.
2. GTD – Good Till the Day/Date OR GFD – Good for the Day: Unlike GTC orders, GTD orders would remain in the system only till the end of the day.

Summing Up

Most of the forex trading accounts offer you different types of orders with minor variation in terminology. Take full advantage of various types of orders available on the forex trading software. Placing right orders at right time paves the way for an opportune entry and exit from your forex trade. If your entry and exit are not well-timed it may happen that your positive Pips could turn into negative Pips. Moreover it is also quite likely that your wrong order could result into huge losses in few seconds. Keep in mind that ultimately the precise entry and exit points make or break your Pips balance Sheet.