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Calculating Profit and Loss For ease of use, most online trading platforms automatically calculate the P&L

o f a traders' open positions. However, it is useful to understand how this calcul ation is formulated To illustrate an FX trade, consider the following two examples. Let's say that the current bidask for EURUSD is 1.461619, meaning you can buy 1 euro for 1.4619 or sell 1 euro for 1.4616. Suppose you decide that the Euro is undervalued against the US dollar. To execut e this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise. So you make the trade to buy 100,000 Euros you pay 146,190 dollars (100,000 x 1. 4619). Remember, at 2% margin (501 leverage), your initial margin deposit would be approximately $2,923 for this trade. As you expected, Euro strengthens to 1.462326. Now, to realize your profits, you sell 100,000 Euros at the current rate of 1.4623, and receive $146,230 You bought 100k Euros at 1.4619, paying $146,190. Then you sold 100k Euros at 1. 4623, receiving $146,230. That's a difference of 4 pips, or in dollar terms ($14 6,190 - 146,230 = $40). Total profit = US $40. Now in the example, let's say that we once again buy EURUSD when trading at 1.46 1619. You buy 100,000 Euros you pay 146,190 dollars (100,000 x 1.4619). However, Euro weakens to 1.461114. Now, to minimize your loses to sell 100,000 E uros at 1.4611 and receive $146,110. You bought 100k Euros at 1.4619, paying $146,190. You sold 100k Euros at 1.4611, receiving $146,110. That's a difference of 8 pips, or in dollar terms ($146,190 - $146,110 = $80) Total loss = US $80. ======================================================================= For ease of use, most online trading platforms automatically calculate the P&L o f a traders open positions. However, it is useful to understand how this calculat ion is derived. To illustrate a typical FX trade, consider the following example. The current bid/ask price for EUR/USD is 1.2320/23, meaning you can buy 1 euro w ith 1.2323 US dollars or sell 1 euro for 1.2320 US dollars. Suppose you decide that the Euro is undervalued against the US dollar. To execut e this strategy, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise. So you make the trade: to buy 100,000 euros you pay 123,230 dollars (100,000 x 1 .2323). Remember, at 1% margin, your initial margin deposit would be $1,232 for this trade. As you expected, Euro strengthens to 1.2395/98. Now, to realize your profits, yo u sell 100,000 euros at the current rate of 1.2395, and receive $123,950.

Your average winning trade makes $600 and your average loss is $300. this common piece of advice can be misleading. or 0. Many trading books and "gurus" advocate a profit/loss ratio of at least 2:1 or 3 :1. your potential l oss should be capped at $100. it is clear that the "old. not always.You bought 100k Euros at 1. each pip is worth $10 . per 100.2395. the individual's trading style an d the individual's average profitability per trade (APPT) factor. That s a difference of 72 pips." commonly held ideas may need to be adjusted.) At first glance. Your probability of a win is therefor 30%.(Probabil ity of Loss x Average Loss) Let's explore the APPT of the following hypothetical scenarios: Scenario A: Let's say that out of 10 trades you place.950 $123. paying $123. This is the formula for average profitability per trade: Average Profitability Per Trade = (Probability of Win x Average Win) . or in dollar terms ($123.which is $900 divided by $300. =================================================================== When trading the forex market or other markets. (For related reading. sh ouldn't any potential loss be kept as small as possible and any potential profit be as large as possible? The answer is. After all.230 = $720). see Limiting Losses. we are often told of a common mo ney management strategy that requires that the average profit be more than the a verage loss per trade.950. The Importance of Average Profitability Per Trade Average profitability per trade (APPT) basically refers to the average amount yo u can expect to win or lose per trade. However. which is also referred to as statistical expectancy. and can cause harm to your trading account. Total profit = US $720 (TIP: When trading EUR/USD or any Euro cross e.000 trade). you profit on three of them and you r ealize a loss on seven.2323. . You sold 100k Euros at 1. For example.7. receiving $123.230. which means that for every $200 or $300 you make per trade. In fact. The blanket advice of having a profit/loss ratio of at least 2:1 or 3:1 per trad e is over-simplistic because it does not take into account the practical realiti es of the forex market (or any other markets). if we take a deeper look at the relationship between profit and loss. Tutorial: The Ultimate Guide To Forex Profit/Loss Ratio A profit/loss ratio refers to the size of the average profit compared to the siz e of the average loss per trade.3. most people would agree with this recommendation. your profit/loss ratio is 3 :1 . It's easy to assume that such common advice must be true. EUR/JPY. or 0. if your expected profit is $900 an d your expected loss is $300 for a particular trade.g. while your probability of loss is 70%. Most people are so focused on either bala ncing their profit/loss ratios or on the accuracy of their trading approach that they are unaware that a bigger picture exists: Your trading performance depends largely on your APPT.

but has more winning trades than losing ones. Read more: http://www. the APPT is a negative number.2 x $300) = $20 In this case. For more forex money management tips. fundamentals and the ps ychology of trading forex. The PowerFX Course. Traditional advice. see Money Management Matters.3 x $600) (0.asp#ixzz1P2 OaY6l2 . Smart Investor and other leading trading/investment publ ications.7 x $300) = . you are likely to lose $30. which means that for every trade you place. It also includes Grace's proprietary tips and tricks. does not have much substantial value in the re al trading world unless you have a high probability of realizing a winning trade . Here is the APPT: (0.investopedia.8 x $100) (0. (For related reading. Technical Analysis o f Stocks & Commodities.com/articles/forex/07/profit_loss. and you realize a loss on two tr ades. even though this trading approach has a profit/loss ratio of 1:3. The book is a perfect complement to the Powe rFX Course. the APPT is positive. That's a losing proposition! Even though the profit/loss ratio is 2:1.) Scenario B: Now let's explore the APPT of a trading approach that has a profit/loss ratio of 1:3. teach es tools and trading approaches that combine technicals. Harriman House). such as making sure your profit is more t han your loss per absolute trade. This revealing book explains how traders can use various market conditions to their advantage by tai loring a strategy to suit each one. Many Ways of Becoming Profitable When trading the forex market. What matters is that your APPT comes up positive and that your overall profits are more than your overall losses.In this scenario. which negates the supposed benefit of having a 2:1 profit/loss ratio. creator of the PowerFX Course and author of "7 Wi nning Strategies for Trading Forex" (2007. there is no one-size-fits-all money management or trading approach. you make profit on eight of them. Let's say out of the 10 trad es you place. the APPT is: (0. which means you can be profitable over time. by Grace Cheng Grace Cheng is a forex trader. see The Importance Of A Profit/Loss Pl an. this trading approach produces winning trades only 30% of the time.$30 As you can see. Grace's works have been published in The Trader's Journal. designed for both new and current traders.