Show me the money!
Now that you understand what a pip is and what a lot is, you need to know why you learnt about them in the first place.
We need pips and lots to work out our profit and loss; so here are the basics of your Ps and Ls.
Remember how we spoke about DIRECT and INDIRECT Forex quotes before? Well here’s where you can put your new knowledge to work!
There are two rules for calculating your profit and loss in forex, and its all about the dollar
Whenever you have a direct quote [where the quote currency is USD] you can calculate your profit and loss by using the following formula
P/L = (SELL PRICE – BUY PRICE) x STANDARD LOT SIZE x NUMBER OF LOTS
Remember that the standard lot size is $100,000 and for mini lots the standard size will be $10,000
Example: You buy 2 lots of EUR/USD at 1.1205 and sell at 1.1210
P/L = (1.1210 – 1.1205) x 100,000 x 2 = $100
Whenever you have an indirect quote [where the quote currency is NOT USD] you can calculate your profit and loss by using the same formula.
Example: You buy 1 lot of USD/AUD at 1.2917 and sell at 1.2932
P/L = (1.2932 – 1.2917) x 100,000 x 1 = 150 AUD
CAREFUL: the profit figure stated here is in AUD, not USD. It is important to remember that with indirect quotes (where USD is not the quote currency) you need to convert the profit and loss figure to USD by dividing by the relevant exchange rate.
You have 150 AUD; divide by the sell price [because you’re selling AUD and buying USD]
150 AUD/1.2932 = 115.99 USD