How Are Profits and Losses in a Trade Calculated?

Profit and loss in forex trading are determined by the number of pips gained or lost, the lot size, and the pip value of the traded currency pair. Here’s how it works:

Example 1: When USD is the Quote Currency (GBP/USD)

• You buy 1 standard lot (100,000 units) of GBP/USD at 1.3502 (ask price).
• The price rises to 1.3520, and you decide to close the trade at the bid price of 1.3520.
• The price difference is 18 pips (1.3520 – 1.3502 = 0.0018).

Pip Value Calculation:

📌 Formula: (0.0001 / Exchange Rate) × Lot Size × Exchange Rate
📌 (0.0001 / 1.3520) × 100,000 × 1.3520 = $10 per pip
📌 Profit: 18 pips × $10 = $180

Example 2: When USD is the Base Currency (USD/CAD)

• You buy 1 standard lot of USD/CAD at 1.2602.
• The price moves to 1.2620, and you close the trade at 1.2620.
• The price difference is 18 pips (1.2620 – 1.2602 = 0.0018).

Pip Value Calculation:

📌 Formula: (0.0001 / Exchange Rate) × Lot Size
📌 (0.0001 / 1.2620) × 100,000 = $7.93 per pip
📌 Profit: 18 pips × $7.93 = $142.74

Key Takeaways:

✔ Buy orders use the ask price, and sell orders use the bid price.
✔ Pip value varies based on the currency pair and whether USD is the base or quote currency.
✔ Larger lot sizes increase potential profits but also increase risk.

Understanding these calculations helps traders manage risk and optimize their trading strategies.