How to Calculate Forex Trading Profits

Blog Summary: Understanding how to calculate forex trading profits is a vital skill for any trader aiming to make informed decisions and manage risk effectively. This blog explains both the conceptual and technical aspects of forex profits, from the factors influencing profitability to the formulas used to calculate gains or losses on trades. 

Every forex trader’s goal is to make a profit. The more profit, the better! But of course, there will be times when you make a profit and times when you sell at a loss. Therefore, as a beginner to currency trading, it’s important to understand how profits are made. It’s essential to develop both a conceptual understanding of the factors that influence trading profits so you can manage risk as well as a concrete understanding of the formula for calculating profits on a per-trade-basis. We’ve written this blog post with both things in mind.

What Determines Whether a Trade is Profitable?

At its core, both profit and loss in forex trading are the result of the difference between the buying price and the selling price of a currency pair. For long positions, if you buy a currency pair at a lower price and sell at a higher price, you make a profit. For short positions, if you sell a currency at a higher price and buy it back at a lower price, you make a profit.

This difference is also known as the “spread” of a trade. But while the spread might represent actual profit, there are many factors that contribute to whether a trader makes a profit, and how much the profit is.

Things like leverage, market volatility, geopolitical events, economic data releases, and more all have direct influence over forex trading profits. (This is, in part, why fundamental and technical analysis are so important).

Now that we’ve briefly discussed the theoretical foundation of forex profits, let’s dig a little deeper into the technical side of how to calculate forex profits.

How to Calculate Profit in Forex Trading

The most basic way to calculate profit and loss of a position is to multiply the position size by pip movement.

Here’s an example of how it works:

Assume you have a 10,000 EUR/JPY position currently trading at 135.20. If the price moves from EUR/JPY 135.20 to 135.70, it has jumped 50 pips.

Calculating the Pip Value

For a 10,000 EUR/JPY position, this 50 pip movement equates to 5,000 Japanese Yen (10,000 x 0.50).

To convert this to USD (for easier understanding), let’s assume the current USD/JPY exchange rate is 145.00.

Therefore, the 5,000 Yen profit is equal to approximately $34.48 (5,000 / 145.00).

Determining Profit or Loss

Long position: If you were long EUR/JPY and the price increased as described, you would have a profit of $34.48. If the price had instead fallen to 134.90 (a 30 pip decrease), you would have a loss of $20.69 (3,000 Yen / 145.00).

Short position: If you were short EUR/JPY and the price increased to 135.70, you would have a loss of $34.48. If the price had fallen to 134.90, you would have a profit of $20.69.

Calculating Forex Profit: Alternate Method

The above is a simplistic way to understand profit. Here’s a formula that may be appropriate in more cases:

Profit = (Exit Price – Entry Price) × Lot Size × Contract Size

Here’s what each of those things means:

• Entry Price: The price at which you open your trade.
• Exit Price: The price at which you close your trade.
• Lot Size: The number of units in your trade (e.g., micro, mini, or standard lot).
• Contract Size: The amount of the base currency represented by one lot (e.g., 100,000 units for a standard lot).

Pulling from the above example, here’s what each of those things would be:

• Entry Price: 135.20 (This is where you opened your position)
• Exit Price: 135.70 (This is where you closed your position)
• Lot Size: 10,000 (This is a mini lot in Forex)
• Contract Size: This is where things get a little tricky with Forex. Unlike some other markets with standardized contracts, Forex contract sizes vary depending on the currency pair. For our EUR/JPY example, the contract size is 1 EUR.

To calculate profits in this scenario using the above formula, here’s what you’d do:

• Find the Price Difference: Exit Price – Entry Price = 135.70 – 135.20 = 0.50
• Find Profit in JPY: 0.50 x 10,000 x 1 = 5,000 JPY
• Convert Profit to USD: 5,000 JPY / 145.00 (USD/JPY rate) = $34.48

With this formula, your profit is $34.48

Why Use a Forex Profit Calculator?

Understanding how to manually calculate the profit of a given trade is an important skill to have. But there are also plenty of forex trading profit calculators available to quickly and automatically configure profits and losses.

Different calculators can be used to calculate different components associated with or part of profit, from forex pips calculators to margin calculators and even currency converters!

Profit calculators allow you to input fields like the instrument, lots, base currency, and open and close price to quickly and accurately determine profits, which can be useful not only after trades are made, but also beforehand.

We recommend using a currency trading profit calculator as a research and forecasting tool to help mitigate risk and familiarize yourself with different possible trade outcomes.

Decrease Trading Risk & Increase Profit Potential with Maven

As we noted in the beginning of this blog, every trader wants to increase profit margins. Understanding what profit is foundationally and how to calculate it is an essential skill for any forex trader to have in pursuit of greater profit.

Maven is a prop firm that provides invaluable hands-on trading experience with very little risk. Learn more about how we work here.