How to Calculate Profit and Loss in Forex Trading

key concepts

Base currency and Quote currency

In forex trading, currencies are traded in pairs, such as EUR/USD or USD/JPY. Each pair consists of a base currency (the first currency in the pair) and a quote currency (the second currency). The base currency is the currency being bought or sold, while the quote currency indicates the amount needed to buy one unit of the base currency. For example, in EUR/USD, EUR is the base currency, and USD is the quote currency.

Additionally, for a trader in the United States, a direct quote refers to a currency pair where the domestic currency (USD) is the base currency, and a foreign currency is the quote currency (e.g., USD/JPY). Conversely, an indirect quote has a foreign currency as the base currency and the domestic currency (USD) as the quote currency (e.g., EUR/USD). Understanding these terms is fundamental to calculating profit and loss (P&L), which varies depending on the type of currency pair.

In this post, we’ll clarify four key concepts—direct quote currency pairs, indirect quote currency pairs, cross-currency pairs ending with a direct quote currency, and cross-currency pairs ending with an indirect quote currency—and provide examples of P&L calculations for each, assuming the trader’s account is denominated in USD.

4 types of currency pairs

assuming the user is in the US

Direct quote currency pairs

A direct quote pair has USD as the base currency and a foreign currency as the quote currency. For example, USD/JPY is a direct quote pair where USD is the base currency, and JPY is the quote currency.

Inverse quote currency pairs

In an indirect quote pair, a foreign currency is the base currency, and USD is the quote currency. For example, EUR/USD is an indirect quote pair where EUR is the base currency, and USD is the quote currency.

Cross-currency pairs ending with a direct quote currency

These pairs do not involve USD but end with a currency typically used as the quote currency in a direct quote pair (e.g., JPY). An example is EUR/JPY, where EUR is the base currency, and JPY is the quote currency.

Cross-currency pairs ending with an inverse quote currency

These pairs exclude USD but end with a currency typically used as the base currency in an indirect quote pair (e.g., EUR). An example is GBP/EUR, where GBP is the base currency, and EUR is the quote currency.

P&L Calculation Formula

The general formula for calculating profit or loss in forex trading is:

Profit/Loss = (Exit Price - Entry Price) × Pip Value × Lot Size × Number of Lots

• Pip: The smallest price move in a currency pair (usually the fourth decimal place for most pairs, except JPY pairs, where it’s the second decimal place).
• Pip Value: The value of one pip in the account currency (USD in this case), which depends on the pair.
• Lot Size: The size of the trade (standard lot = 100,000 units, mini lot = 10,000 units, micro lot = 1,000 units).

Below, we calculate P&L for each type of currency pair with examples, assuming a USD-denominated account and a standard lot size (100,000 units).

Direct Quote Currency Pair: USD/JPY

Example:

• Trade: Buy 1 standard lot of USD/JPY at 150.00 and sell at 150.50.
• Pip Movement: 150.50 - 150.00 = 0.50 (50 pips, as JPY pairs use two decimal places).
• Pip Value: For USD/JPY, pip value is (0.01 / Exit Price) × Lot Size. At 150.50, pip value = (0.01 / 150.50) × 100,000 ≈ $6.645 per pip per lot.
• P&L Calculation: Profit = 50 pips × $6.645 × 1 lot = $332.25.

Result: The profit is $332.25.

Indirect Quote Currency Pair: EUR/USD

Example:

• Trade: Buy 1 standard lot of EUR/USD at 1.0800 and sell at 1.0850.
• Pip Movement: 1.0850 - 1.0800 = 0.0050 (50 pips).
• Pip Value: For EUR/USD, pip value is fixed for a USD account: 0.0001 × 100,000 = $10 per pip per lot.
• P&L Calculation: Profit = 50 pips × $10 × 1 lot = $500.

Result: The profit is $500.

Cross-Currency Pair Ending with a Direct Quote Currency: EUR/JPY

Example:

• Trade: Buy 1 standard lot of EUR/JPY at 160.00 and sell at 160.50.
• Pip Movement: 160.50 - 160.00 = 0.50 (50 pips).
• Pip Value: For EUR/JPY, pip value is in JPY: (0.01 / 160.50) × 100,000 = ¥6.23 per pip. Convert to USD using USD/JPY rate (assume 150.50): ¥6.23 / 150.50 ≈ $0.0414 per pip per lot.
• P&L Calculation: Profit = 50 pips × $0.0414 × 1 lot = $2.07.

Result: The profit is $2.07.

Cross-Currency Pair Ending with an Indirect Quote Currency: GBP/EUR

Example:

• Trade: Buy 1 standard lot of GBP/EUR at 1.1800 and sell at 1.1850.
• Pip Movement: 1.1850 - 1.1800 = 0.0050 (50 pips).
• Pip Value: For GBP/EUR, pip value is in EUR: 0.0001 × 100,000 = €10 per pip. Convert to USD using EUR/USD rate (assume 1.0850): €10 × 1.0850 = $10.85 per pip per lot.
• P&L Calculation: Profit = 50 pips × $10.85 × 1 lot = $542.50.

Result: The profit is $542.50.

Key Notes

• Account Currency: Since the account is USD-denominated, P&L for non-USD quote currencies (e.g., JPY, EUR) requires conversion to USD using the relevant exchange rate.
• Pip Value Variations: JPY-based pairs have pips in the second decimal place (0.01), while most others use the fourth decimal place (0.0001).
• Broker Costs: Account for spreads, commissions, or swap fees, as they reduce net profit.
• Leverage: Leverage amplifies both profits and losses, so use it cautiously.

Conclusion

Calculating P&L in forex trading requires understanding the base and quote currencies, as well as the distinction between direct and indirect quotes from the perspective of a U.S.-based trader. Direct quote pairs like USD/JPY, indirect quote pairs like EUR/USD, and cross-currency pairs like EUR/JPY and GBP/EUR each involve specific calculations, particularly for pip value conversions in cross pairs. By mastering these calculations, traders can evaluate their performance and manage risk effectively.

For real-time exchange rates or further details, consult trusted forex platforms or your broker. Happy trading!