How to calculate profit and loss on your foreign exchange trades

Web-based currency trading platforms offered by most FOREX firms typically calculate the Profit & Loss of a trader's open positions. The software does it for you automatically. Nevertheless, it's necessary to understand how the software performs these calculations. Once you've figured this all out, and practiced a bit, it should all be second nature.

We'll begin by walking through a text-book Forex trade with the following example:

Let's say the current bid/ask price for USD/JPY is 106.22/106.27, meaning you can buy $1 US for 106.27 Japanese Yen or sell $1 US for 106.22.

Suppose you decide that the US Dollar (USD) is undervalued against the Japanese Yen (JPY). To execute this strategy, you would buy Dollars (simultaneously selling Yen), and then wait for the exchange rate to rise.

So you make the trade: purchasing US$100,000 and selling 10,627,000 Yen. (Remember, at 1% margin, your initial margin deposit would be $1,000.)

As you expected, USD/JPY rises to 107.12/107.17 You can now sell $1 US for 107.12 Yen or buy $1 US for 107.17 Yen.

Since you're long dollars, you must now sell dollars and buy back the Yen to realize your profit.

You sell US$100,000 at the current USD/JPY rate of 107.12, and receive 10,712,000 JPY. Since you originally sold 10,627,000 JPY, your profit is 85,000 JPY.

To calculate your P&L in terms of US dollars, simply divide 85,000 by the current USD/JPY rate of 107.12.

Your total profit = US $793.50