Forex Trading: Calculate Profit and Loss on Forex Trading

Forex Trading: Calculate Profit and Loss on Forex Trading: The foreign exchange market or foreign exchange market is an all-weather cash market where the currencies of various countries are bought and sold. Forex trading is always done in currency pairs. For example, you buy euros and pay in U.S. dollars, or you sell Canadian dollars for Japanese yen. The value of your foreign currency investments can increase or decrease due to changes in currency exchange rates or foreign exchange rates. These changes can happen at any time and are often caused by economic and political events. This article uses hypothetical Forex investments to show you how to calculate profit and loss in Forex trading.

To understand how exchange rates affect the value of your foreign exchange investments, you need to learn how to read foreign exchange quotes. Forex quotes are always expressed in pairs. In the example below, your currency pair is the US dollar (USD) and the Canadian dollar (CAD). Forex quotes, USD/CAD = 170.50, which means that one US dollar is equal to 170.50 Canadian dollars. The currency to the left of the “/” (USD in this case) is called the base currency, and its value is always 1. The currency to the right of the “/” (CAD in this case) is called the base currency inverse currency. In this example, one U.S. dollar can buy 170.50 Canadian dollars because it is the stronger of the two currencies. The U.S. dollar is considered the central currency in the foreign exchange market, and it is always considered the base currency in any foreign exchange quote, as long as it is one of the currency pairs in it.

In this example, your currency pair is USD and EUR. The EUR/USD exchange rate on August 26, 2003 was 1.0857, or 1 USD equals 1.0857 EUR, the weaker of the two currencies. If you purchased EUR 1,000 on that day, you would pay $1,085.70.

A year later, the EUR/USD exchange rate is 1.2083, which means that the EUR has increased in value relative to the USD. If you sold €1,000 a year later, you would receive $1,208.30, $122.60 more than when you started a year ago.

Conversely, if the foreign exchange rate after one year is EUR/USD = 1.0576, the value of the euro against the dollar will weaken. If you sold 1,000 EUR at this foreign exchange rate, you would receive $1,057.60, which is $28.10 less than when you started a year ago.

Like stocks and mutual funds, foreign exchange trading carries risks. Risk arises from fluctuations in the currency exchange market. Low-risk investments, such as long-term government bonds, typically have lower returns. Higher-risk investments, such as foreign exchange trading, can yield higher returns. To achieve your short- and long-term financial goals, you need to balance security and risk to a level of comfort that is best for you.

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