Forex Exchange Profit and Loss Calculations
The success or failure of a trader is measured in the profits and losses they accumulate. This is why all traders should know how to calculate their forex exchange profits and losses. Traders should also know how these profits and losses affect their margin balance on the trading account.
Forex Exchange Realised and Unrealised Profit and Loss
When trading in real time all forex trades are marked to market. This means that the mark to market calculation will show all of the unrealised profits and losses of your trading. The term unrealised in the forex exchange means that the position is still open and can be closed at any time. The value you use at this point is the value you would get should the position be closed immediately. Realised profits and losses are only of trades that have been completed. With a realised profit your margin balance increases, but with a loss the balance decreases.
The total margin balance of your account is not the amount of money you have in the account. It is the sum of the initial deposit, the realised and unrealised profit and loss. Your margin balance will actually fluctuate because the market to market values will change with the market prices.
Calculating Profit and Loss
The calculation you use for profit and loss is actually simpler than most people imagine. For this calculation you need to have the size of the position and how many pips it has moved. The calculation is actually the positions size multiplied by the pip movement. Whether you are making a profit or loss depends on the type of position it is, long or short.
With a long position if the price has moved up then you are making a profit. However, if the price moves down then you are making a loss. With a short position is the price moves up then you are making a loss and if it moves down you are making a profit.
To find your margin balance you need to take your initial deposit and add the profits or subtract the losses. However, most of the time you do not actually have to complete this calculation by hand. Most brokers actually complete this calculation automatically. Of course, it is best tat you understand how these calculations are completed so you understand what the brokerage is telling you. It should be noted that margin calculations are generally done in US dollars.
When you know this calculation you can also calculate the account balance you need to hold a position. When you do this you should include any leverage you are going to use as well. This can be done by adding the leverage amounts to the position size in the calculation.
It is important that every trader knows how to calculate their profits and losses. By doing this you can not only see whether you are a successful trader, but you can also see how much you need to hold a position. The margin balance that you calculate will fluctuate if you have open positions.
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