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Getting Started in Currency Trading, by Michael Archer and Jim Bickford

December 30th, 2008

Page 53 – What Every Trader Must Know – Calculating Profit and Loss
A pip is the smallest price increment that any currency pair can move.  In Forex markets, profits are calculated in terms of pips first and then dollars second.

Scenario 1 – Earning a Profit when USD is the Quote Currency

Currency Pair: EUR/USD

Position: Buy (note: can buy or sell)

Number of Units: 10,000 (note: number of individual units, not number of lots of mini-lots)

Entry Price: 1.2563 (note: regardless if trade was market order or limit order)

Exit Price: 1.2588 (note: regardless if trade was market order or limit order)

Conversion Rate: 1 (note: necessary to convert profit or loss to USD if the quote currency is not USD – if quote currency is USD, the coversion rate is 1)

Price Change: Exit Price – Entry Price = 1.2588 – 1.2563 = +0.0025

Profit in Pips: +25 (note: price change times pip factor, or +0.0025 x 10,000 = +25)

Profit in USD: Price Change x Units Traded = +0.0025 x 10,000 = +$25.00

Scenario 2 – Earning a Loss when USD is the Quote Currency

Currency Pair: GBP/USD

Position: Sell (note: can buy or sell)

Number of Units: 30,000 (note: number of individual units, not number of lots of mini-lots)

Entry Price: 1.8863 (note: regardless if trade was market order or limit order)

Exit Price: 1.8883 (note: regardless if trade was market order or limit order)

Conversion Rate: 1 (note: necessary to convert profit or loss to USD if the quote currency is not USD – if quote currency is USD, the coversion rate is 1)

Price Change: Entry Price – Exit Price = 1.8863 – 1.8883 = -0.0020

Profit in Pips: -20 (note: price change times pip factor, or -0.0020 x 10,000 = -20)

Profit in USD: Price Change x Units Traded = -0.0020 x 30,000 = -$60.00

Scenario 3 – Earning a Profit when USD is the Base Currency

If the quote currency is not the USD, then the profit must be converted to USD using the conversion factor.

Currency Pair: USD/JPY

Position: Buy (note: can buy or sell)

Number of Units: 10,000 (note: number of individual units, not number of lots of mini-lots)

Entry Price: 105.42 (note: regardless if trade was market order or limit order)

Exit Price: 105.77 (note: regardless if trade was market order or limit order)

Conversion Rate: 105.77 (note: we need to use the exit price to convert the JPY to USD)

Price Change: Exit Price – Entry Price = 105.77 – 105.42 = +0.35

Profit in Pips: +35 (note: price change times pip factor, or +0.35 x 100 = +35)

Profit in USD: Price Change x Units Traded / Exit Price = +0.35 x 10,000 / 105.77 = +$33.09

Scenario 4 – Earning a Loss when USD is the Base Currency

If the quote currency is not the USD, then the profit must be converted to USD using the conversion factor.

Currency Pair: USD/CAD

Position: Buy (note: can buy or sell)

Number of Units: 5,000 (note: number of individual units, not number of lots of mini-lots)

Entry Price: 1.3152 (note: regardless if trade was market order or limit order)

Exit Price: 1.3142 (note: regardless if trade was market order or limit order)

Conversion Rate: 1.3142 (note: we need to use the exit price to convert the JPY to USD)

Price Change: Exit Price – Entry Price = 1.3142 – 1.3152 = -0.0010

Profit in Pips: -10 (note: price change times pip factor, or -0.0010 x 10,000 = -10)

Profit in USD: Price Change x Units Traded / Exit Price = -0.0010 x 5,000 / 1.3142 = -$3.80

Scenario 5 – Earning a Profit when using Non-USD Cross Rates (USD/Quote)

In this case, we must look up the current price of the currency pair containing USD and the quote currency of the cross rate pair to get back to USD.

Currency Pair: CHF/JPY

Position: Buy (note: can buy or sell)

Number of Units: 10,000 (note: number of individual units, not number of lots of mini-lots)

Entry Price: 85.46 (note: regardless if trade was market order or limit order)

Exit Price: 85.86 (note: regardless if trade was market order or limit order)

Conversion Rate: 105.32 (note: this is the current price of the USD/JPY currency pair)

Price Change: Exit Price – Entry Price = 85.86 – 85.46 = +0.40

Profit in Pips: +40 (note: price change times pip factor, or +0.40 x 100 = +40)

Profit in USD: Price Change x Units Traded / Conversion Rate = +0.40 x 10,000 / 105.43 = +$37.98

Scenario 6 – Earning a Profit when using Non-USD Cross Rates (Base/USD)

In the previous example, the USD was the base currency in the conversion pair (USD/JPY) and in this example, the USD is the quote currency of the conversion pair (GBP/USD).

Currency Pair: EUR/GBP

Position: Buy (note: can buy or sell)

Number of Units: 20,000 (note: number of individual units, not number of lots of mini-lots)

Entry Price: 0.6754 (note: regardless if trade was market order or limit order)

Exit Price: 0.6772 (note: regardless if trade was market order or limit order)

Conversion Rate: 1.8902 (note: this is the current price of the GBP/USD currency pair)

Price Change: Exit Price – Entry Price = 0.6772 – 0.6754 = +0.0018

Profit in Pips: +18 (note: price change times pip factor, or +0.0018 x 10,000 = +18)

Profit in USD: Price Change x Units Traded x Conversion Rate = +0.40 x 20,000 x 1.8902 = +$19.05

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