In our last lesson we continued our discussion on the logistics of forex trading with a look at what a pip is as well as fractional pip pricing. In today's lesson we are going to continue our free forex trading course with a look at how to calculate profits and losses in the forex market.

As the forex market does not have a standardized trade size and because many currency pairs are not quoted in terms of US Dollars the method for calculating profits in the forex market is a little more difficult than in many other markets.

Luckily most forex trading platforms list out how much the value of a 1 pip move in the market is on the platform so clients do not have to calculate this themselves. With this in mind lets quickly login to our real time demo trading platforms so we can see where this is listed. If you have not done so already I encourage you to register for a free realtime demo account which can be done above this video if you are watching on InformedTrades.com or in the description section if you are watching on Youtube.

Once in the platform you will see the dealing rates window and in that window you should see two tabs at the top, one that says "advanced dealing rates" and one that says "simple dealing rates". Click the tab that says simple dealing rates, which will switch over to a different looking dealing rates window with a bunch of columns in it. If you scroll over to the right you will see a column that says "pip cost". The numbers listed under this column are the value of a 1 pip move in the market for each currency pair.

To calculate your profit or loss all you really need to do is take that number and multiply it by the number of pips of potential profit and loss you have on the trade, and then multiply that by the number of contracts you are trading. This will give you the total potential profit and loss on the trade in US Dollars.

As an example lets say that I am trading 3 standard contracts of USD/CHF. My profit target on this trade is 100 pips and my stop loss is 50 pips away from my entry price. To get the total dollar amount of potential risk and reward on this trade, I would simply multiply the pip value of USD/CHF which as of this lesson is $9.95 by 100 which would give me $995. This is my potential profit on the trade per 1 contract. As I am trading 3 contracts I would then multiply $995 times 3 which would give me $2985 in potential profit on the trade.

To get my potential loss on the trade I would simply multiply the pip value of 9.95 by 50 which would give me a potential loss of $497.50 for each contract traded. As I am trading 3 contracts I would then multiply that $497.50 by 3 which would give me $1492.50 in potential loss on the trade.

As you will notice if you scroll down the Pip Cost column of the realtime demo trading platform, the value of a 1 pip move in currency pairs where the US Dollar is the counter or second currency in the pair is always $10. This is because, as we have learned in earlier lessons, a currency quote represents how many of the second currency in the pair it takes to buy 1 of the first currency. As we are trading contract sizes of 100,000 of the base currency a 1 pip move in 4 decimal place currency pairs is equal to .0001 * 100,000 which equals $10 in currency pairs where the USD is the second currency in the pair.

As you will also notice for currency pairs where the US Dollar is not the second currency in the pair the value of a 1 pip move in the market varies. This is because in those instances the counter currency is not the US Dollar and therefore the value of a 1 pip move has to be converted back into US Dollars at the current exchange rate.

So for example if we are trading USD/CHF and a 1 pip move in the market is equal to .0001 CHF * 100,000 which gives you 10 CHF. So, as just stated, in order to get the pip value for the USD/CHF currency pair in US Dollars you must then convert the 10 CHF back into US Dollars.

Since the calculations are done for you on the platform we are not going to get into all the math here it is simply important to know that for any currency pair where the US Dollar is the second currency in the pair then the value of a 1 pip move in the market will always be $10. For any currency pair where the US Dollar is not the counter currency, the value of a 1 pip move in the market will vary depending on the exchange rate of whatever currency is the second currency in the pair and the US Dollar.

Thats our lesson for today, in our next lesson we will learn about leverage and something which is known as trading on margin so we hope to see you in that lesson. As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Again, thanks again for all of these videos Dave,

Yesterday, we had the windows replaced in the house, and it was just nuts around here, so I didn't want to trade during that mess. So I figured to take the time, install the platform, and play around with trades. Continuing education and all like that.

Is it just me, or is the volatility a lot less in the Forex - than say - Futures or when looking with stocks with enough beta to day trade? I don't know. Just has a different 'feel'. I'm trying to put my finger on it. Takes a bit of getting used to ...

Hey Airelon,

No worries man thanks for participating and glad to see you are checking out the forex stuff. Even if someone never trades this market I feel that because the forex market is affected by pretty much every other market, having an understanding of what moves the FX market will aid traders of any market.

I think its also a good lesson to anyone else who may be reading this that you did not trade yesterday when you had all that stuff going on at your house. As you know so many people underestimate the affects that outside stresses can have on their trading so I agree that it is always better to sit it out in those types of situations.

To answer your question, although as I am sure you also know there are certain futures contracts that trade with very low volatility, you are correct that the major currencies when traded against the US Dollar have relatively low volatility.

This is one of the things that many institutions like about the market because the fact that the market in general has very low volatility, combined with the fact that there is so much leverage available allows traders to make the market whatever they want.

They can keep the market low volatility by trading it with little to no leverage, or they can kick the leverage up and make it as volatile as they want it to be.

While I would not recommend any new traders try this, there are certain currency pairs that do see higher volatility when the US Dollar is not included the favorite of which among FX traders is probably the GBP/JPY.

Hope that helps. Feel free to post any other questions or comments.

Best Regards,
Dave

Thanks David, it does help.

Yeah, when I'm trading, I don't want to be bothered - at all. Unfortunately - at times friends and family think they can stop by and just chat because "Ah, Dan just works at home, so it's cool. He just 'has the life of riley'" and I've had to, at times forcefully - let them know that when I'm trading that I'm not being rude - but I can't be sidetracked.

As to the demo account.

Hmm. I'm doing something wrong.

For some reason, every time a trade goes in my favor? I mean really in my favor? It closes me out with a profit of 0.10 cents.

Man I know what you mean about the working at home thing. Its like people think you are just chilling out surfing the internet or something.

Thats very strange regarding the demo account, something I have not heard before which is rare. In the market order window that comes up after you click the dealing rates window there is a button that says "Advanced". Hit that button and that should bring up a drop down menu. If anything there is checked then it should be unchecked.

If that is not the issue then shoot me a pm with your login info and I will check it out.

Best,
Dave

"Just surfing the net" - yeah - I get that constantly. And god forbid my wife walk by when I'm typing anything. That, for some reason - isn't "work".

You know what, I think I figured out what I was doing wrong. Still getting used to Forex platforms / orders. Just different enough for me to assume I should have entered the order in one manner. I'm assuming a lot from my stock / futures trading platforms (I use optionsXpress and Scottrade). In the advanced tab - I've been wanting "Limit" orders for limit entries, and wondering if therein lay my problem. Let me play with it a bit more today ...

Yeah I am ready for the day when there are enough people working from home that there are like little neighborhood offices that you can go when you want to get away from people that aren't working;-)

Let me start my explanation here with a disclaimer that anyone who is reading this and is not an experienced futures or equities trader should disregard this conversation and watch the videos to learn how order entry works. For Airelon and anyone else who is experienced in the market the way this particular FX platform is setup can be a little confusing and I need to use terminology that beginners are not ready for yet and do not need to explain it to him.

If you want to be executed on a market order only at that price or better then what you do is set the "at market points" in the market order box to zero. The "at market points" allows you to set the amount of slippage that you are willing to accept on a market order so setting that box to zero essentially makes the market order a limit.

The "stop" and "limit" order lines that you see in the advanced tabs are not used to enter the market. These are conditional OCO orders which are used to close out the position. So basically they are conditional in the sense that they do not become active until a trade is opened and then once the trade is opened if one is hit the other is canceled. All orders on this platform are GTC.

If you want to enter an order to be executed away from the market then you use the "entry" button. This will allow you to place an order conditional on the market moving to a certain level, however these are executed as stop orders in the traditional sense. As you will notice there you can also place a stop loss and take profit order which are conditional on the entry price being hit.

If you decide that you may want to trade FX live then FXCM has a couple of options for pro traders one of which is strategy runner which you may be familiar with from the futures side. So anyhow if you play around with this one and decide that you would prefer a more traditional order entry setup then I can get you hooked up with the pro platform just let me know.

Let me know if that does not make sense or if there is anything else that needs clarifying.

Best,
Dave

PERFECT sense. From my experience with other platforms, I was looking for that "Limit" order, and just assumed it was a type of entry.

When I started to look at how the market was executing, I was beginning to wonder if it was a mistake with my entering the limit. Then when you mentioned that this was a type of OCO - it just fell into place.

Thanks again Dave,

Dan

Sounds good. Yeah in my opinion one of the brilliant things that FXCM did early on that really gave them an edge was simplify the order entry offerings so someone who is new to trading did not have to spend a lot of time learning the logistics of the platform and could learn about the market.

The funny thing is that a side effect of that is that it actually makes things a little confusing for more experienced guys at first.

Best,
Dave

Hey David,

I was a little confused regarding the number of contracts.

When you gave the example: "I would simply multiply the pip value of USD/CHF which as of this lesson is $9.95 by 100 which would give me $995. This is my potential profit on the trade per 1 contract. As I am trading 3 contracts I would then multiply $995 times 3 which would give me $2985 in potential profit on the trade. "

When you say 3 contracts, do you mean 3 out of the traditional 100 contracts?

Or do you mean 3 open positions with 100 contracts each, with a total of 300?

I hope that's not confusing and you understand what I'm asking.

Thanks in advance.

Sincerely,
Bill