By Adinah Brown

You don’t have to be an economics major to be able to calculate your profit and loss. In fact, not much more than 2nd grade math is required. Why is it then, that so many traders overlook the important step of maintaining a P&L of their trades?

Not only is your success (or failure) as a trader measured in terms of your profits and your losses, but having a clear view of how much money you have at stake, at any point in which you have a trade open, is crucial to the effective management of your risk. As such, here is a short and simple guide to calculating your P&L:

To put it in plain English, in order to calculate the profit and loss of a trade, all you need to do is multiply the size of the position, by how many pips the price has moved. Let’s say you have opened a GBP/USD position for 100,000 and the position is currently trading at 3.4240. If the price moves to 3.4255, then that means the price has moved up 15 pips. For a 100,000 trade, the 15 pips equal US$150 (100,000 x 15). Now, how would you know if those US$150 are a loss or a profit? In a long position, if the prices moved up, then you’ve profited, whereas if they went down you’ve lost. In a short position, the opposite is true: if the prices moved up, you’ve lost, if they’ve moved down, you’ve profited.

At any time in which you have a position opened, the prices of currencies are fluctuating, therefore your P&L is constantly changing, generating what is called an unrealized profit or loss. Once you close out a position, the profit or loss becomes realized.

The margin balance in your account is the addition of your initial margin deposit, your realized P&L and your unrealized P&L. Because of this, whenever you have positions opened, your margin balance is fluctuating. Margin balances are typically calculated in USD, but P&L is denominated in the quote currency, so in order to calculate your margin balance, you must convert your P&L to USD.

While every brokerage on the internet offers a P&L calculator to automatically calculate the profits and losses of your trades, it is important that you know how to do it manually, so you can properly structure your trades before you open them.

About the Author:

Adinah Brown is a professional writer who has worked in a wide range of industry settings, including corporate industry, government and non-government organizations. Within many of these positions, Adinah has provided skilled marketing and advertising services and is currently the Content Manager at Leverate.