Many new traders are not very inclined to perform complex calculations to assess the losses and gains of their Forex trade. In general, the Forex profit calculators offered by the trading platforms automatically perform the calculations related to the estimation of the losses and gains. A trader wishing to professionalize must understand how to calculate profit and losses on Forex to avoid taking unnecessary risks.
Win or lose on the currency market
Forex is one of the most liquid and lucrative financial markets today in the world. Investing in the currency market consists of carrying out the trading operations considering changes in currencies offered by the exchange rates on trading platforms. Before initiating a transaction, a trader must consider rate fluctuations to obtain the return of investments. The amount of the profit or loss is thus equal to the difference between the selling and buying price of a currency pair.
In the currency market, leverage affects the amount of profit and loss. Gains and losses are proportional to the value of the leverage. However, even with the low leverage, an investor can make large profits by varying the lot’s size to be traded on Forex.
A standard Forex transaction usually amounts to 100000 currency units. A trader with a mini account can trade with smaller lots, i.e., tens of thousands of units.
How to Evaluate Forex Losses
The Forex trader must anticipate the rise in the value of currency during the transaction in order to make profits in a foreign exchange currency. An investor buying a lot of a currency pair should have sufficient evidence that that pair’s value will move higher. So if the value of the pair goes down, the trader will face a loss.
Some main factors that can affect exchange rates include:
- the level of market liquidity
- economic news
- political events
Calculating Forex Profits and Losses
In a trading operation, the Forex profit calculations are generally entrusted to the software which is a forex profit calculator tool. The trader must fully understand the software’s principle to evaluate the profits and losses in a Forex trade.
Take into account the pip value
The pip refers to the difference in fluctuation in the exchange rate of a currency. For a currency initially listed at 1.0694 and costing 1.0695 after a certain period, the pip is 0.0001. The estimate of exchange rate profits and losses takes this variation into account. But to calculate the pips on Forex, you need a few things about the currency pair being traded, such as:
- lot size
- the definition of pip
- the rate of the base currency
- the rate of the counter currency
The profitability of Forex investments
The profitability of investing in the currency market depends on the pairs chosen, the size of the contract, and the pip’s value. The US dollar is a base currency that has a virtually constant value of the one pip. The final profitability of operation could be assessed based on various costs such as commission fees, bid / ask spread, rollover.
The advantage of properly structured trading on Forex
Gains and losses are not attributed solely to currency movements but rather to the investor’s trading methods. Thus, the trader can miss the best opportunities by hesitating on which lots to buy or by closing its positions early enough.
Therefore, it’s essential to have a well-put-together trading plan before embarking on forex trade.
Limit Forex Losses
Several factors affect the results of the forex trade. These factors are the subject of the calculations that contribute to the profits or losses on the transaction. Thus, there is no strategy to prevent losses. However, with the right to for-profit calculation, traders can limit the risks.