The profit and loss calculation of foreign exchange transactions is determined by the difference between the buying and selling prices. When the selling price is higher than the buying price, investors gain profits; When the selling price is lower than the buying price, investors suffer losses.
Foreign exchange trading gains and losses refer to the profits or losses generated during trading in the foreign exchange market based on the price difference between buying and selling. The calculation method for profit and loss of foreign exchange transactions is based on the difference between the buying price and the selling price of the transaction in the basic currency.
Firstly, we need to understand some basic concepts in foreign exchange trading. Currency transactions in the foreign exchange market are conducted in the form of currency pairs, including the base currency and the quoted currency. The basic currency is the first currency in a transaction, while the quoted currency is the second currency in a transaction. For example, in the EUR/USD currency pair, the euro is the base currency and the US dollar is the quoted currency.
When we engage in foreign exchange trading, we can choose to buy or sell currency pairs. If we expect the price of a currency pair to rise, we can choose to buy the currency pair, which is called taking a long position. On the contrary, if we expect the price of a currency pair to decline, we can choose to sell the currency pair, which is called short selling.
In foreign exchange trading, profit and loss are calculated based on the difference between the buying and selling prices. If we buy a currency pair and the price rises, we can sell the currency pair to earn a profit. At this point, our profit is calculated based on the selling price minus the buying price. On the contrary, if we buy a currency pair and the price drops, we will lose money by selling the currency pair. At this point, our losses are calculated based on the buying price minus the selling price.
The calculation method for foreign exchange trading profit and loss can be expressed by the following formula:
Profit and loss = (selling price minus buying price) × trading volume × the value of each point
Among them, the value of each point refers to the minimum unit of change in currency relative to price. Different currency pairs have different values for each point, depending on the pricing method of the currency pair. For example, in an EUR/USD currency pair, the value of each point is usually $0.0001.
In addition to the above calculation methods, foreign exchange trading gains and losses can also be viewed through the transaction history provided by the trading platform. The transaction history will display the buying price, selling price, trading volume, and profit and loss situation of each transaction. By viewing transaction history, we can understand the profit and loss situation of each transaction as well as the overall profit and loss situation.
The following example will demonstrate the method and process of calculating foreign exchange trading gains and losses for you:
Assuming the current EUR/USD quote is 1.4616/19, it means you can buy 1 euro for $1.4619 or sell 1 euro and buy $1.4616 at the same time.
Suppose you predict that the euro will appreciate against the US dollar, so you are willing to buy EUR (while selling USD) and wait for the exchange rate to rise.
So, you bought 100000 euros (100000 x 1.4619) for $146190. Using a margin leverage of 1:100, your margin account needs to have $1461.
As you expected, EUR/USD has increased to 1.4623/26. In order to achieve profits, you sold 100,000 euros at a price of 1.4623 and received $146230.
You previously bought 100000 euros for $146190, but now you sell 100000 euros and exchange them for $146230. The difference between them is 4 points, which is $40 ($146190-146230 = $40).
Total profit: $40
In the same example, suppose you still buy 100,000 euros for $146190 at the EUR/USD quote of 1.4616/19.
However, this time the EUR/USD fell to 1.4611/14. To reduce losses, you chose to exit at this price, selling 100,000 euros and exchanging them back for $146110.
You previously bought 100000 euros with $146190, but now you sell 100000 euros and exchange them back for $146110. The difference between them is 8 points, which is $80 ($146190 minus $146110 = $80).
Total loss: $80
When conducting foreign exchange transactions, we need to pay attention to risk management. The foreign exchange market is highly volatile, and there may be significant fluctuations in profit and loss. Therefore, we need to reasonably control trading volume, set stop-loss and stop-gain orders, and develop reasonable trading strategies to reduce risks and protect fund security.