Calculating Trade Profit
From FXPedia
Essentially, there are two ways you can make a profit trading forex. You can buy (go long) a currency which you sell later for a price greater than you paid; or, you can sell (short) a currency that you subsequently buy at a lower price than you paid in order to close your position.
This in itself is straight-forward enough, but you must also take into consideration how the spread affects the calculation of your profitability. The following examples – one for a buy and one for a sell – illustrate the steps you must take to calculate the return for each trade you close.
Example 1 - Taking a Short Position
You see that the bid / ask for EUR/USD is 0.9517/22 and decide to sell (short) 10,000 EUR and your trade is executed at 0.9517. Your position is determined as follows:
10,0000 EUR * 0.9517 = 9,517.00 USD
Therefore, you sold 10,000 EUR and bought 9,517 USD, making you short 10,000 EUR and long 9,517 USD.
Later, the market decreases to EUR/USD 0.9500/05. You decide to close your position (i.e. buy back the 10,000 EUR you have shorted). The new exchange rate ask price is 0.9505 so the amount of USD required to buy back 10,000 EUR is:
10,000 EUR * 0.9505 = 9, 505.00 USD
In your first transaction, you sold 10,000 EUR which at the time, was worth $9,517.00 USD. Later, you bought back 10,000 EUR to close your position, but by then, the exchange rate had fallen and it only cost you $9505.00 USD. Therefore, you retained a profit of $12.00 USD within your account:
$9,517 USD (USD purchased in first trade) – $9,505 USD (USD sold to close position) = $12.00 USD
Example 2 – Taking a Long Position
The bid / ask for USD/JPY is 115.00/05 and you take a long position (i.e. you buy) of 10,000 USD. The trade is executed at 115.05:
10,000 USD * 115.05 = 1,150,500 JPY
You have now bought 10,000 USD and sold 1,150,500 JPY so your position is long 10,000 USD and short 1,150,500 JPY.
As the market changes for this currency pair, you decide to close your position and sell your USD holdings – the exchange rate has moved to USD/JPY:114.45/50 and you sell at 114.45:
10,000 USD * 114.45 = 1,144,500 JPY
To determine if you realized a profit on the transactions, consider the first trade where you went long 10,000 USD and shorted 1,150,500 JPY. In the second trade, you sold 10,000 USD to close the position which resulted in you receiving 1,144,500 JPY, resulting in a loss of 6,000 JPY.
1,150,500 JPY (JPY sold in first trade) – 1,144,500 JPY (JPY bought to close position)= (-6,000 JPY)
To show the loss in USD, convert 6,000 JPY to USD using the ask price (currently 114.50) and either of the follow methods:
- -6,000 JPY / 114.50 = $-52.40 USD, or
- -6,000 JPY * (1 / 114.50) = $-52.50 USD
Therefore, your two trades resulted in a net loss of $52.40 USD.
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