How to Calculate Profit and Loss

To calculate the profit or loss of a trade, you need to know:

• The number of pips you have earned or lost
• How much each pip is worth
• The volume traded in lots

The difficult part is figuring out the monetary value of a pip, as currencies don’t have standardised trade sizes and many currency pairs are not quoted in USD.

Profit or loss = Change in number of pips * Pip value * Number of lots

In a profitable long trade, the closing price will be higher than the opening price.  If the closing price were lower than the opening price, this would result in a trading loss. To profit from a short trade, where a sell order is placed on the currency pair, the closing price must be lower than the opening price.  Should the closing price be higher than the opening price, the trade will close at a loss.

What is a Pip?

A Pip is an acronym for Percentage In Point and represents the smallest price change that a given currency exchange rate can make.  Each increase or decrease in pips represents a profit or a loss in your trade. The majority of currencies are quoted to the fourth decimal place (EUR/USD 1.1950) with the exception being USD/JPY, which is quoted to two decimal places (USD/JPY 110.25). When the EUR/USD exchange rate moves from 1.1950 to 1.1951, it has moved 1 pip because the fourth decimal point has increased by one.

How to Calculate the Pip Value

The majority of trading platforms display how much each pip represents. However, it’s still good to know how to determine the pip value. When the USD is the quoted currency, usually each pip equals 1 USD for every lot traded (10,000 USD), so if you buy five lots, each pip will be valued at 5 USD.

Calculating Pip Value Example

If you buy $100,000 ($10/pip) of EUR/USD at the price of 1.1700 and then the EUR/USD exchange rate rallies 100 pips, and you've decided to sell your trade for a profit at 1.1800 you have earned $1000 = 100 pips x $10/pip. In this case, the pip value is $10 = 10 lots traded * $1.

Pip Value when USD is the Base Currency

When the USD is the base currency, the pip value floats, making it more difficult to calculate. To make things simple when dealing with direct currency rates that have the USD as the base currency, you can directly apply the following formula to determine the pip value:

Pip Value = (One Pip / Exchange Rate) * Lot size

Example 1

If you bought $50,000 USD/CHF at 0.9800 and then sold your position at 0.9850, you made a profit. Since the selling price is higher than the buying price means that you have made 50 pips profit.

Closing Price 0.9850 – Opening Price 0.9800 = +50 pips

To calculate the value of 1 pip at the closing price, we divide 1 by 0.9850, to get a pip value of $1.0204.  With the pip value established, the total profit on the trade is 50 x 5 x $1.0152 = $253.80.

Example 2

If we buy 1 standard lot ($100,000) USD/CAD at an exchange rate of 1.2500, each pip move in your favour will be worth $8.

Pip Value = (0.0001 / 1.2500) * 100.000 = 8 USD

Let’s assume that after we bought USD/CAD, the exchange rate drops 50 pips (1.2450) and hits our stop loss in which case we incur a loss of $450.

PnL = Pips Gained (Lost) * Pip Value * Lots Traded

PnL = -50 pips * $8 * 1 contract = -$450

Pip Value with Cross Rate Pairs

Cross rate pairs are those that don't include the USD as either the base or the quote currency. To calculate a pip value for these pairs, the formula changes

Pip Value = ((1 / Exchange Rate) * Lot size) * Base Currency against USD 

Example

If we buy 1 standard lot of GBP/JPY at 147.00, to calculate the pip value we’ll need the exchange rate of the base currency, which in our case is the GBP/USD and we’ll use 1.3500 as our conversion exchange rate.

Pip Value = [(0.01 / 147.00) * 100.000] * 1.3500= 9.18 USD

For every 0.01 pip move in GBP/JPY, you’ll earn $9.18 if the exchange rate moves in our favour.  The trader will lose $9.18 if the exchange rate moves against the position. Let’s assume you bought 5 contracts and close the trade once the GBP/JPY exchange rate reaches 150.00 capturing 300 pips. The next step is to apply our PnL formula to see our net USD profits.

PnL = 300 pips * $9.18 * 5 contracts = $13,770

Conclusion

Traders should know the profit or loss of an open trade at any given time, and since profit is directly connected to the change in pips of the currency pair in the position, a trader needs to be aware of pip value as this will affect the account balance. It’s also important to know the pip value before opening a position, as you don’t want to open trades that risk too much of your account balance.  Continue reading for risk management strategies.