How to Calculate Currency Profits and Loss

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A newcomer or a beginner to the Forex world is required to understand currency trading as well as the importance of smaller divisions in making normal transactions. The smaller division is known as PIP which is an abbreviation of Price Interest Point. In short form it is known as point. In the U.S the smallest cash division is a penny. It offers US currency to be traded in $0.0001.

Forex trade is conducted in large lots. Estimates of US $100,000 are dealt in Forex trading. When smaller divisions (point) are used to value currency it enables substantial gains and losses for traders. If we take an example for instance, we say that a lot US $100,000 is offered then one pip is worth $10 respectively. When pips are increased to a number of 40, it will simultaneously establish a gain and loss of 400$.

The standard lot which is used in Forex trading is 100,000 units of base currency although currencies are traded in various lot sizes. Unit explains the name of the currency in case of lots. When we calculate a unit in US dollars it means one dollar.

There are different sized pips in different currencies. If we consider the US dollar, the pips of 0.0001 is expressed. Similarly, Japanese Yen is expressed on a decided pip of 0.01. The value of a pip is dependent upon the Major which is being traded and the lot’s size. Ideally the US dollar USD is paired with any other currency to have profits. Usually USD is selected as a quote and the second currency as a base. A pair of CAD/USD hits the value of $ 10 as pip value. To calculate the value of different currencies a pip value calculator is used.

It depends on the Forex trader to deal with different types of orders. Order type and size affects the profits and loss which is made in every transaction. Here are few orders which are used by Forex traders.

Market Order: Deals with the current market price to purchase or sale. Markets orders vary and must be kept in mind, as market can be slow or fast moving. A careful, watchful behavior can make a difference. There would be a difference in the market price when it is displayed at a time and the time when a transaction is made i.e., the actual market price. This situation is fruitful for slippage to rise; slippage is the amount through which market moves at a time. Slippage is sometimes responsible for gain or loss in Forex trading as the prices changes within few seconds.

Limit Order: Is a certain level of limit to buy or sell. This type of order is used to buy a currency on either below market price or sell above market price. For buying particularly the order is executed when the market falls and comes at the level of price which is stated in your limit order. For selling particular order is executed when a rise is noticed in the market and reaches the limit order specified by you. Limit orders may not lead you to slippage.

Stop Order: It is an order which allows selling below market price and buying above the market price. It is called stop-loss order. Stop-loss order sells currency below point.

By following the orders and understanding the pip’s value, one can calculate profits and loss in the Forex market.

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