Calculating Profit And Loss Using Pips In Forex Trading
Pip is the smallest point to calculate price changes in
forex trading. Therefore, the accumulated gains and losses during the current
position following the price movement in forex are calculated in Pip units. One
pip tip value varies depending on the currency pair being traded as well as the
current exchange rate. Thus, one pip point on EUR / USD will be different from
the value of one pip in USD / JPY.
Before calculating the pip, we must first know the size of
the contract in trading. Forex trading can not be done per one Dollar, but
based on the size of a particular contract. Generally, there are three types of
contracts:
Standard contract: 1 lot = 100,000 units (one hundred
thousand units, if we trade with US Dollar base currency, it can be called one
hundred thousand USD).
Mini contract: 1 lot = 10,000 units (ten thousand units; if
we trade with US Dollar base currency, it can be called ten thousand USD).
Micro contract: 1 lot = 1,000 units (one thousand units; if
we trade with US Dollar base currency, it can be called a thousand USD).
When opening an account at a broker, the trader will
determine the amount of the contract for his trade. After that, if you want to
trade, then use lot count, whether to buy or sell 1 standard lot, 1 mini lot
(0.1 standard lot), or 1 micro lot (0.01 standard lot), or more.
For example, when we will open a buy position in EUR / USD
pair, then we will buy one lot of base currency for the exchange rate shown by
the current price. For example, currently EUR / USD shows exchange rate
(exchange rate / price) 1.05000, that means every 1.05 US Dollars can be
redeemed for 1 Euro. In practice, if you buy one standard lot of EUR / USD,
then it is actually worth 100,000 base currency, multiplied by the exchange
rate. Similarly if 2 micro lots, then that means 2,000 times the exchange rate
.
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| Candlestick chart/pips |
However, despite its capital in foreign currency, the price
movement of each currency pair is calculated in units of Pips. If so, then how
to calculate forex profit? Here's how.
Calculating Profit Forex For Major Pair
Pair Major is the name for the currency pair with the
highest liquidity and trading volume in forex. The Major Pair always includes
the US Dollar as its base currency or quote currency. Here are some examples of
calculating forex profit in Pair Major:
a. Direct Pair
Direct Pair is the major pair with USD as its quote
currency, such as GBP / USD, EUR / USD, AUD / USD, and NZD / USD. Here's how to
calculate forex profit in its pip:
Pip = lot size * tick size
Next, to calculate the profit and loss we need to know the
difference between the exchange rate when the position opened and closed.
Fortunately or loss =
Difference in exchange rate * pip
Information:
Lot size: number of base currency units
Tick size: position the pip in a row of numbers behind the
decimal
Example of calculating forex profit in Direct Pair:
Currently the pair EUR / USD shows the exchange rate worth
1.08250, then 1 pip in lot trading standard is worth:
Pip: 100,000 (standard lot) * 0,00010 = 10, so every 1 pip
in EUR / USD with 1 standard lot is worth USD 10
Pip: 10,000 (mini lot) * 0.0001 = 1, every 1 pip on EURUSD
with 1 mini lot worth 1 US Dollar.
Because each pair of direct quote currency is always USD, then
the pip value will always be the same on all pairs with US Dollar in the back
position. Simple, right?
Next, it is known that the sell position opened at 1.08250
and closed at 1.08100 with standard trading lot. The price difference at that
position is 15 pips. Since the price actually goes down, then the sell position
is profit, so the profit calculation is: the difference of pip * value per pip
= 15 pip * USD 10 = USD 150
b. Indirect Pair
Indirect pair is pair with USD as base currency, such as USD
/ JPY, USD / CHF, and USD / CAD. How to calculate forex profit in its pip is:
http://www.seputarforex.com/belajar/forex/text_dasar/img/counting-advantages-and-advantages-from-pips-di-forex-4.jpg
Information:
Current rate: current exchange rate
Example # 1:
Currently the pair USD / JPY shows the exchange rate worth
111,500, then 1 pip in the standard lot is worth:
pip = 100,000 * 0.01 / 111.50
pip = USD8.97 or about USD 9
Next, it is known that a buy position opened at 111,500 and
then closed at 112,500 on the standard lot. As prices rise, then the buy
position is profitable.
Profit calculation = difference of exchange rate * pip
Fortunately = 100 * 8.97 = USD 897
Example # 2:
Currently the pair USD / CAD shows the exchange rate worth
0.75500, then 1 pip in the standard lot is worth:
pip = 100,000 * 0,0001 / 0.75500
pip = USD 7.55
Given the sell position opened at 0.75500 then closed at
0.75450 in the standard lot. Because prices fall, then the position is
profitable.
Good thing = 5 * 7.55 = USD38
Calculating Forex Profit In Pip For Pair Cross
Pair Cross is currency pairs that do not match the US Dollar
as its base or quote currency. Pair Cross movement in certain situations can be
very high, even more drastic than Pair Major.
Example:
Currently EUR / GBP is trading at 0.85500, while EUR / USD
is trading at 1.07500. Then the value per pip in the standard trading lot is:
Pip = 100,000 * 0.0001 (1.07500 / 0.85500)
Pip = 10 (1.257) = USD12.57
Known a buy position opened on EUR / GBP 0.85500 then closed
at 0.85570 in standard lot. Because prices rise, then the position is
profitable. The difference is 7 pips, so fortunately is 7 * 12.57 = USD 87.99
Additional information:
For pair Cross with Quote Currency JPY (JPY position behind
like GBP / JPY, NZD / JPY, etc.) calculation of profit and loss in pip
following USD / JPY. So if current USD / JPY 1 pip is worth USD 9.1 then all
pair cross with Quote Currency JPY follow the pip value.
Lazy Count, Fuss? Quiet, Many Alternatives
The above calculations do require considerable
time-consuming calculations. Not to mention the fact that prices are constantly
changing in the Forex market. Therefore if you want to reduce your stress
level, use the Pip Calculator. Guaranteed simple, fast and do not wear
dizziness.
In addition, trading tools provided by forex brokers are
usually able to automatically calculate the conversion of Pips to Dollars. You
are trading enough, profit pips will be obtained will also appear in the form
of Dollars. This you can see for yourself if you open a Demo account, the
account in forex brokers that can be used to view market conditions and
practice trading without capital and without risk
Margin and Leverage
From this explanation, maybe you feel scared. If once
buy must be at least 1 lot, it must have thousands of US Dollars first? Not
really.
Forex brokers provide a facility called leverage. Leverage
is a proportional loan scheme with a guarantee, so it can increase the
purchasing power of funds owned trader. For example a broker offers 1: 100
leverage, meaning trader with 10 USD capital can have purchasing power of 1000
USD (from 10x100). In this case, 10 USD becomes a guarantee fund (Margin) that
traders need to hand over to the broker. This is one of the advantages of forex
trading that allows us all to transact in the forex market.
Although the profit will also be adjusted in proportion to
the leverage used by traders, but obviously the capital required traders to
start earning money from forex is very low.
