Forex or Foreign Exchange is a financial market for many private investors to trade foreign exchange and speculate on the financial market. However, before embarking on specific transactions Forex, it is necessary to understand its functioning, notably concerning the processes that determine profits and losses on investments.

Calculation of profits and losses on Forex

The calculation of profits and losses on Forex is based firstly on the calculation of pip. A pip is the smallest unit effect of variation in the exchange rate of a quotation that is to say two currencies on which a trader invests. And it is this fluctuation that determines the profit or loss on an investment given by the positions taken in response to the listing, which relies on its rise or to fall.

Calculating pip

The following example illustrates the principle of calculating pip. If a trader with a U.S. standard Forex account with a starting bankroll of \$ 8,000, for example, wants to invest in the quotation EUR / JPY 153.88, it must first purchase at least one batch equivalent to 100,000 units the base currency in the trading target. As he has only \$ 8000, he can buy 0.5 lot of trading EUR / JPY that is to say, which is \$ 4,000 and use a leverage of 1: 100 to invest \$ 4,000 X 100 = \$ 400,000. At that moment, the exchange rate of the U.S. dollar against the euro: EUR / USD 1.3941. The calculation of pip is given by the following formula: Price of 1 pip = ((value of 1 pip) / (exchange rate of investment)) x x value of the prize exchange rates, given that:

* 1 pip price is expressed in dollars,
* value of 1 pip = 0.01 for the EUR / JPY,
* exchange rate of investment = value of trading EUR / JPY 153.88,
* lot value = \$ 400,000,
* = exchange rate USD / EUR 1.3941.

Which gives in practice: price 1 pip = (0.01 / 153.88) * 400000 * 1.3941 = 36.238 \$. From this point, the trader opens a position by focusing on increasing the quotation EUR / JPY 153.88.

Calculation of earnings if the listing has an upward trend

The calculation of earnings by multiplying the number of pips achieved after closing the position on the upward trend in the price quotation by 1 pip. Thus, if the listing goes eg from 153.88 to 154.03, which corresponds to an increase of 15 pips, the trader earned \$ 36.238 x 15 = \$ 543.57. After this transaction, the trader has now 8 \$ 543.57 in his account after investing \$ 4000 on rising Currency: EUR / JPY.

Calculation of losses if the listing has a downtrend

Similarly, the loss calculation is done by multiplying the number of pips lost after closing the position on the downward trend in the price quotation by 1 pip. If the listing goes from 153.88 to 153.68, which corresponds to a decrease of 20 pips, the trader has lost \$ 36.238 x 20 = \$ 724.76. This leaves \$ 8000 – \$ 724.76 = \$ 275.24 7 in the trader’s account after he invested \$ 4,000 on rising EUR / JPY cross.

Additional costs that have an impact on the gains and losses

There are fees charged on a transaction on the Forex and must therefore be subtracted or added profits to losses. It is the spread and rollover.

The spread and rollover

The spread is the difference between the sale price and the purchase price of a currency pair. In general, the broker pays the Forex spread the cost may vary according to brokerage firms. He is charged when the trader opens and closes a transaction is between 3 and 5 pips. It can be lower in a major dealer or market maker in a fixed. Thus, he makes a profit or losing it on a transaction in the Forex currency, the investor must still pay the spread if it used a broker. The rollover is the interest paid or to be paid when a position is kept more than a day.