For anyone who is just starting to learn about forex trading, they must have come across many technical terms which might confuse them or overwhelm them with their meanings and processes. It is true that currency trading is no easy feat however it is not completely impossible either. With the help of correct guidance, well-researched but simple learning material, and determination, anyone can become a successful forex trader.
Generally, your forex broker calculates your profit and loss margins automatically so you do not need to use this skill as frequently however the reason the traders themselves learn to calculate these is that when you plan for a trade you must know potential profits and loss you might get, basing on whichever direction the prices moved.
To get a clear understanding let us know some basic forex trading terms which will help in understanding the process.
Position size: It refers to the number of units or the amount that a trader is going to invest in a particular trade. It helps in knowing how many units of security they can purchase with their amount.
Pip movement: It is the price interest point, which means the smallest move a currency price can make in a forex market. For example, USD/EUR can make $0.0001 smallest move in their price, also called one basis point.
Long Position: In this position, the trader is expecting the value of a currency to increase in order to sell them at a higher rate later, if as expected the prices do not go up the trader will face a loss.
Short Position: This is the opposite of long where the trader is expecting the prices to go down in order to buy that currency at a lower price later to earn the profit, if the prices go in the opposite direction as expected then that will be a loss trade.
Now simply in order to calculate your profit and loss margin before entering a trade, you need to multiply the position size with the number of pip movements. A good example would be that you have a $150,000 AUD/USD position currently trading at 0.8970. If the prices move from AUD/USD 0.8970 to 0.8980, then it is an increase of 10 pips. To calculate the profit or loss margin we multiply the $150,000 AUD/USD position with 0.0010 which gives us $150 as a profit or loss margin. We recommend that you need to start with demo account, rather than just putting money live!
In order to determine whether $150 here is profit or loss, you need to know if you were trading at a long position or short, if it was long and the same situation as above happened it is a profit. If the prices were to drop down to the same pips numbers in the same long position that would be a loss. We can calculate the same for a short position.
To master any skill one must have strong foundations regarding basic concepts and ideas. Although forex brokers calculate the profit and loss for every trade you need to know these calculations to decide whether to go for a trade or not.