So far, we have thoroughly studied the basic terms and concepts used in Forex, as well as the principle of margin trading. It is time to learn how to calculate gains and losses on the transaction.
We know that the Internet trader enters the international currency market through dealing company which opens his account in US dollars. To work on the Forex trader must convert the initial amount of money on this. All gains and losses from completed transactions, regardless of currency transactions are translated into US dollars. In this chapter it will be discussed in detail the principle of calculating gains and losses.
In general, the formula for calculating the financial result of the transaction can be written as follows:
Financial result = (sale price - purchase price) * number of lots * lot size - commissions * number of lots ± bank interest
As we can see, the financial result is made up of three parts: the trading result, paid commission and bank interest.
We already know that there are two types of quotes in the Forex (excluding cross rates) - forward and backward. In the first case, the base currency is the foreign currency against the dollar and is expressed (quoted) in US dollars. In the second case, the dollar itself is the base currency is expressed in units of foreign currency. Trading results in the above formula is calculated in the quoted currency. Fees and banking interest is usually expressed in dollars, so the formula is valid only for direct quotations. It should be noted that in the wording of the sale price and the purchase price - it does not make up quotes, but the real price for which we sell and buy currency, no matter what it was before the operation (buy or sell). When the outcome is positive, we profit. If it is negative, we assume losses.
For indirect quote is the difference between buying and selling prices denominated in foreign currencies, whereas the overall financial result is expressed in dollars. Therefore, for the calculation of the financial result for the direct quote uses the following formula:
Financial result = (1 / purchase price - 1 / sale price) * number of lots * lot size - commissions * number of lots ± bank interest
The lot size depends on the particular quote (by currency pairs) and on the preferences of a particular online broker. The above formula is used, if the lot size is expressed in a foreign currency (not in US dollars). For example, a lot size of direct quotation GBP / USD may be 70,000 British pounds.Or the size of the lot on the back quotation USD / JPY could be 12 500 000 Japanese Yen. If your Internet broker specifies the size of the lot in dollars, in order to use the above formula, you will need to convert dollars into the relevant currency. Lot Size in foreign currency, in this case, is not fixed and will depend on the current exchange rate prevailing on the date of opening the position. In US dollars the size of a standard lot is almost always equal to 100,000.
The calculation of the financial result for the cross rates comes a little differently. As we discussed in the relevant chapter, cross training - it is an exchange rate relative to each other, except for the US dollar. Any cross rate can be represented by two dollar quotes. For example, the cross EUR / JPY rate can be calculated through the quotation EUR / USD and the quotation USD / JPY. Calculation of profit and loss in this case is as follows.First, the financial result is calculated on the quotation EUR / USD, and then calculates the financial results for the quotation USD / JPY. These financial results are added to obtain the overall financial result.
As we know, in the Forex currency exchange rates vary in points. In different quotations different point size. When you open a position, it is important to know what the trading result brings us change course by one point in dollar terms. It will assess its current profit or loss and time to close the position. Using the above formula, this value is easily calculated and depends on the type of quotation (direct or inverse), the size of the lot, expressed in the currency in which the lot and the size of the item.
Consider a direct quotation GBP / USD with a lot size of 70,000 GBP and the size of the item 0.0001. As a direct quote, we use the first formula to calculate the results.Minimum difference between the purchase price and the selling price is always one item, in this case equal to 0.0001. Therefore, the trading result from changes in GBP / USD rate of one lot at one point is equal to 0.0001 * 70,000 = $ 7.
Consider the inverse USD / JPY quotation to the size of one lot of 12 500 000 Japanese Yen and the size of the item 0.01. Since quotation reverse, we use the second formula to calculate the results. To know the value of one point in the case of indirect quote is not enough as the trading result also depends on the values themselves buy and sell prices. Assume that the current value of the course is equal to 104.75 Japanese yen to the dollar. Then the trading result of the exchange rate USD / JPY one lot is equal to one point (1 / 104.75 - 1 / 104.76) * 12 500 000 = 11.39 USD. It is worth noting that the different buying and selling prices, we get different results. If the lot size is expressed in dollars, it would have to be pre-translated into yen at the relevant exchange rate at the time of opening the position. And if open long positions (buying dollars for yen), it would be used for the calculation of rate of sale, and if the short (selling dollars for yen), then - the rate of purchase.
As we can see, change course by one point at different quotes gives different results. At the quotation GBP / USD it is smaller than in the quotation USD / JPY. The lower trading result of the change of course by one point, the less damage you will incur in the event of an unfavorable exchange rate. But on the other hand, the less will be your profit, if the rate of change in the desired direction. Beginners Internet traders are encouraged to work with a less "aggressive" quotations such as the GBP / USD and USD / CHF.
At first glance, discussed in this chapter methods of calculation may seem too complicated. But you do not make sense to worry about it, because all the calculations associated with the profits and losses, trading platform are executed automatically. Different dealing companies use different trading platforms, but the principle of calculation does not change. You also important to understand what constitutes your profit and loss, not to close the position at a loss by mistake!
We know that the Internet trader enters the international currency market through dealing company which opens his account in US dollars. To work on the Forex trader must convert the initial amount of money on this. All gains and losses from completed transactions, regardless of currency transactions are translated into US dollars. In this chapter it will be discussed in detail the principle of calculating gains and losses.
In general, the formula for calculating the financial result of the transaction can be written as follows:
Financial result = (sale price - purchase price) * number of lots * lot size - commissions * number of lots ± bank interest
As we can see, the financial result is made up of three parts: the trading result, paid commission and bank interest.
We already know that there are two types of quotes in the Forex (excluding cross rates) - forward and backward. In the first case, the base currency is the foreign currency against the dollar and is expressed (quoted) in US dollars. In the second case, the dollar itself is the base currency is expressed in units of foreign currency. Trading results in the above formula is calculated in the quoted currency. Fees and banking interest is usually expressed in dollars, so the formula is valid only for direct quotations. It should be noted that in the wording of the sale price and the purchase price - it does not make up quotes, but the real price for which we sell and buy currency, no matter what it was before the operation (buy or sell). When the outcome is positive, we profit. If it is negative, we assume losses.
For indirect quote is the difference between buying and selling prices denominated in foreign currencies, whereas the overall financial result is expressed in dollars. Therefore, for the calculation of the financial result for the direct quote uses the following formula:
Financial result = (1 / purchase price - 1 / sale price) * number of lots * lot size - commissions * number of lots ± bank interest
The lot size depends on the particular quote (by currency pairs) and on the preferences of a particular online broker. The above formula is used, if the lot size is expressed in a foreign currency (not in US dollars). For example, a lot size of direct quotation GBP / USD may be 70,000 British pounds.Or the size of the lot on the back quotation USD / JPY could be 12 500 000 Japanese Yen. If your Internet broker specifies the size of the lot in dollars, in order to use the above formula, you will need to convert dollars into the relevant currency. Lot Size in foreign currency, in this case, is not fixed and will depend on the current exchange rate prevailing on the date of opening the position. In US dollars the size of a standard lot is almost always equal to 100,000.
The calculation of the financial result for the cross rates comes a little differently. As we discussed in the relevant chapter, cross training - it is an exchange rate relative to each other, except for the US dollar. Any cross rate can be represented by two dollar quotes. For example, the cross EUR / JPY rate can be calculated through the quotation EUR / USD and the quotation USD / JPY. Calculation of profit and loss in this case is as follows.First, the financial result is calculated on the quotation EUR / USD, and then calculates the financial results for the quotation USD / JPY. These financial results are added to obtain the overall financial result.
As we know, in the Forex currency exchange rates vary in points. In different quotations different point size. When you open a position, it is important to know what the trading result brings us change course by one point in dollar terms. It will assess its current profit or loss and time to close the position. Using the above formula, this value is easily calculated and depends on the type of quotation (direct or inverse), the size of the lot, expressed in the currency in which the lot and the size of the item.
Consider a direct quotation GBP / USD with a lot size of 70,000 GBP and the size of the item 0.0001. As a direct quote, we use the first formula to calculate the results.Minimum difference between the purchase price and the selling price is always one item, in this case equal to 0.0001. Therefore, the trading result from changes in GBP / USD rate of one lot at one point is equal to 0.0001 * 70,000 = $ 7.
Consider the inverse USD / JPY quotation to the size of one lot of 12 500 000 Japanese Yen and the size of the item 0.01. Since quotation reverse, we use the second formula to calculate the results. To know the value of one point in the case of indirect quote is not enough as the trading result also depends on the values themselves buy and sell prices. Assume that the current value of the course is equal to 104.75 Japanese yen to the dollar. Then the trading result of the exchange rate USD / JPY one lot is equal to one point (1 / 104.75 - 1 / 104.76) * 12 500 000 = 11.39 USD. It is worth noting that the different buying and selling prices, we get different results. If the lot size is expressed in dollars, it would have to be pre-translated into yen at the relevant exchange rate at the time of opening the position. And if open long positions (buying dollars for yen), it would be used for the calculation of rate of sale, and if the short (selling dollars for yen), then - the rate of purchase.
As we can see, change course by one point at different quotes gives different results. At the quotation GBP / USD it is smaller than in the quotation USD / JPY. The lower trading result of the change of course by one point, the less damage you will incur in the event of an unfavorable exchange rate. But on the other hand, the less will be your profit, if the rate of change in the desired direction. Beginners Internet traders are encouraged to work with a less "aggressive" quotations such as the GBP / USD and USD / CHF.
At first glance, discussed in this chapter methods of calculation may seem too complicated. But you do not make sense to worry about it, because all the calculations associated with the profits and losses, trading platform are executed automatically. Different dealing companies use different trading platforms, but the principle of calculation does not change. You also important to understand what constitutes your profit and loss, not to close the position at a loss by mistake!
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