Calculating Profits and Losses of Your Currency Trades

Currency trading is challenging, but it can offer profitable opportunities for well-educated investors. It is risky and traders must always keep close track of their positions—after all, the success or failure is measured in terms of the profits and losses (P&L) on their trades.

It is important for traders to clearly understand their P&L because it directly affects the margin balance in their trading account. If prices move against you, your available margin decreases, reducing the funds available for trading.

Key Takeaways

• It is important for currency traders to clearly understand their profits and losses (P&L) because it directly affects the margin balance in their trading account.
• All your foreign exchange trades are marked to market in real time. The mark-to-market calculation shows the unrealized P&L of your trades. “Unrealized” means that the trades are still open and the values of your profits or losses are not final.
• To calculate profit and loss in a position, you need to know the position size and the number of pips the price has moved. The actual profit or loss will be equal to the position size multiplied by the pip movement.

Realized and Unrealized Profit and Loss

All your foreign exchange trades are marked to market in real time. The mark-to-market calculation shows the unrealized P&L of your trades. The term “unrealized” means that the trades are still open and the values of your profits or losses are not final.

The mark-to-market value is the value at which you can close your trade at that moment. If you have a long position, it is the price at which you can sell. For a short position, it is the price at which you can buy to close.

Until a position is closed, the P&L will remain unrealized. The profit or loss is realized (realized P&L) when you close out a trade position. In case of a profit, the margin balance is increased, and in case of a loss, it is decreased.

The total margin balance in your account is always equal to the sum of the initial margin deposit, realized P&L, and unrealized P&L. Since the unrealized P&L is marked to market, it fluctuates as the prices of your investments continuously change. Consequently, the margin balance also constantly changes.

Calculating Profit and Loss

The actual calculation of profit and loss in a position is quite straightforward. You need to know the position size and the number of pips the price has moved. The actual profit or loss will be equal to the position size multiplied by the pip movement.

Let’s look at an example:

Assume that you have a 100,000 GBP/USD position currently trading at 1.3147. If the prices moved from GBP/USD 1.3147 to 1.3162, they would jump 15 pips. For a 100,000 GBP/USD position, the 15-pips movement equates to $150 (100,000 × 0.0015).

To determine if it’s a profit or loss, we need to know whether we were long or short for each trade.

Long position: In the case of a long position, if the prices move up, it is a profit, and if the prices move down, it is a loss. In our earlier example, if the position is long GBP/USD, then it would be a $150 profit. Alternatively, if the prices had moved down from GBP/USD 1.3147 to 1.3127, it would’ve meant a $200 loss (100,000 × -0.0020).

Short position: In the case of a short position, if the prices move up, it is a loss, and if the prices move down, it is a profit. Using the same example, if we had a short GBP/USD position and the prices moved up by 15 pips, it would be a loss of $150. If the prices moved down by 20 pips, it would be a $200 profit.

Fast Fact

A full breakdown of your balances—including capital and P&L by position, available margin, and total account value—can typically be viewed in your forex brokerage account, or on the trading platform you use.

The following table summarizes the calculation of P&L:

Another aspect of the P&L is the currency in which it is denominated. In our example, the P&L was denominated in dollars. However, this may not always be the case.

In our example, the GBP/USD is quoted in terms of the number of USD per GBP. GBP is the base currency and USD is the quote currency. At a rate of GBP/USD 1.3147, it costs USD 1.3147 to buy one GBP.  As the price fluctuates, so will the dollar value. For a standard lot, each pip will be worth $10, and the profit and loss will be in USD. As a general rule, the P&L will be denominated in the quote currency, so if it’s not in USD, you will have to convert it into USD for margin calculations.

Consider you have a 100,000 short position on USD/CHF. In this case, your P&L will be denominated in Swiss francs. As of September 2024, the pair trades at around 0.8455. For a standard lot, each pip is worth CHF 10. If the price moved down by 10 pips to 0.8445, it would mean a profit of CHF 100. To convert this P&L into USD, you will have to divide the P&L by the USD/CHF rate; i.e., CHF 100 ÷ 0.8445, which is $118.4132.

Once we have the P&L values, these can easily be used to calculate the margin balance available in the trading account. Margin calculations are typically in USD.

What Is Foreign Exchange (Forex) Trading?

Forex trading involves simultaneously buying one currency while selling another in hopes of profiting from changes in their relative values.

What Does ‘Mark to Market’ Mean?

Mark to market (MTM) is a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities.

What Is a Pip in Forex Trading?

A pip is the smallest whole unit price move that an exchange rate can make, based on forex market convention.

The Bottom Line

You do not need to perform P&L calculations manually, as all brokerage accounts automatically calculate the profit or loss for all your trades. However, it is important that you understand how these calculations work, and what effect they may have on your margin requirements.

Depending on how much leverage your trading account offers, you can calculate the margin required to hold a position. For example, if you have a leverage of 100:1, you will require a margin of $1,000 to open a standard lot position of 100,000 USD/CHF. Having a clear understanding of how much money is at stake in each trade will help you manage your risk effectively.