Successful Forex trading involves preparation, knowledge of the market’s specificity, and developing your own investment strategy. One of the secrets of a successful investment is to manage the risk and discover inherent limitations in any transaction. In order to assess risk, it is crucial to understand how much you can potentially earn, how much you can lose and hypothetical performance results. The Forex trading calculator is the perfect tool for it. This trading program is available on every reputable foreign exchange platform. Let’s see what a Forex profit calculator is and how the calculation of Forex profit works.
In a dynamic market, it is essential to be able to respond quickly to changing conditions. Every investor should know how to calculate the critical parameters in a transaction and understand what determines them.
However, in the age of technological advancement, there are many tools designed to make investments more straightforward and more convenient.
Most of the trading platforms available from forex brokers generally automatically calculate the P&L (profit & loss) of traders’ positions.
Many traders and in particular novice traders sometimes have trouble understanding how this data is calculated. Therefore we will explain the way the profit on Forex can be calculated.
Example of calculating a Forex profit
The current price of the major EUR / USD currency pair is 1.2477 / 1.2478, that is, we can buy 1 euro for 1.2477 dollars or sell 1 euro for 1.2478 dollars. Suppose here that the euro is in our opinion undervalued against the US dollar, then we decide to buy the euro (simultaneously selling the US dollar).
The leverage of our trading account is 1: 400. In other words, our investment capacity is 400 times greater than the capital invested. By wanting to buy € 100,000 we are investing (€ 250 in the market), after the effect of leverage this amounts to paying $ 124,770 (100,000 x 1.2477).
As we predicted the euro strengthened against the US dollar and the price progressed higher, it gained 10 pips within a few minutes and reached 1.2487 / 88. We then decide to take our earnings by selling our position of 100,000 € at the current rate of 1.2487 and receive in exchange $ 124,870.
To conclude, we bought € 100,000 at 1.2477 thus paying $ 124,770, then we sold $ 100,000 at the rate of 1.2487 receiving $ 124,870, this gain of 10 pips which is profit of $ 100 ($ 124,870 – $ 124,770 ).
The price of EUR / USD continues to rise. So we decide to buy again at the rate of 1.2501 / 1.2502. We buy 100,000 euros and pay $ 125,010.
However, our forecast turns out to be wrong. The euro seems to be weakening. The price falls back to the level of 1.2495. To reduce our loss to the minimum, we instantly sell 100,000 euros at this rate and therefore receive $ 124,950.
So we bought 100,000 euros at 1.2501 paying $ 125,010 and sold 100,000 euros at 1.2495 having received $ 124,950, it’s a loss of 6 pips which translates into a financial loss of $ 60 ($ 125,010 – $ 124,950) .
As you could see, Forex profit calculator is a handy tool that allows you to quickly set the position volume according to your capital as well as quickly calculate the hedge levels required to close an order following the user’s investment strategy. It helps you to easily manage the risk without having to do the calculations on your own.