calculating foreign currency trading's profit and loss

Although most online forex sites (Such as Forex On Demand)offer their investors an easy-to-use program to calculate P&L (profit and loss) for every open position, it is still very important to understand how this is being done.

Lets say that the current ask/bid price for EUR/CHF is 1.3240/45. This means you can buy one Euro with 1.3245 Swiss Marcs or sell one Euro for 1.3240 Swiss Marcs. You predict that the Euro is undervalued against the Swiss Marc and is about to appreciate. You decide to buy Euros (while selling Swiss Marcs) and wait till the exchange rate rises in your favor.

You decide to get ahead and execute this trade. You buy 100,000 Euros for 135,450 Swiss Marcs (1.3245 X 100,000) and wait. Remember that with a decent margin account you only need 1324.5 Swiss Marcs in your account. Most online forex brokers usually offer a margin account of 1%.

According to your prediction the Euro does appreciates and it is now valued against the Swiss Marc on 1.3287/1.3290. You proceed and sell the 100,000 Euros on the current 1.3287 price and receive 132,870 Swiss Marcs. Your original buy price was 1.3245 and you sold it for 1.287. That is a difference of 42 pips. In Euro terms – 132,870 – 135,450 = 420$. Your total profit on this one transaction is 420 USD.

Ronald Piers, Editor

2005–11–10