## Calculating Profit and Loss

### PIP & Profit/Loss Calculation

Understanding how to calculate pip value and profit/loss requires a basic knowledge of currency pairs and crosses.

**Direct Rates:** GBP/USD, EUR/USD, AUD/USD, NZD/USD**Indirect Rates:** USD/JPY, USD/CHF, USD/CAD**Cross Rates:** GBP/JPY, EUR/JPY, AUD/JPY, EUR/GBP, GBP/CHF*(Where the US Dollar is not involved)*

### Profit/Loss Calculation

#### DIRECT RATES

Currency pairs where the USD is the quote currency are referred to as direct rates. This holds true for such currencies as the EUR,GBP, NZD and the AUD.

##### Calculating direct Rate Pip Value

Pip stands for "price interest point" and refers to the second smallest incremental price move of a currency.

While pippets are the smallest, most calculations are done for pips.

Pip value for direct rates are calculated according to the following formula:**Formula: Pip = lot size x tick size**

Example for 100,000 GBP/USD contract:

1 pip = 100,000 (lot size) x .0001 (tick size) = $10.00 USD

##### Calculating Direct Rate P/L (Profit/Loss)

Calculating P/L for direct rates is calculated as follows:**Formula: Selling price - Purchase price = P/L**

Example for 200,000 GBP/USD contract initially bought at 1.7505 then closed at 1.7540:

1.75404 (selling price) - 1.75055 (purchase price) = 35.1 pip profit

To further convert the above P/L to USD, use the following calculation:

Formula: Pip profit (loss) x lot size x tick size = USD profit (loss)

35.1 (pip profit) x 200,000 (lot size) x .0001 (tick size) = USD $702 profit

#### INDIRECT RATES

Most currencies are traded indirectly against the U.S. Dollar (USD), and these pairs are referred to as indirect rates. An example is the USD/JPY (Japanese Yen). The USD is the "base currency," the JPY is the "quote currency" and the rate quote is expressed as units per USD. An example of a indirect rate is as follows: USD/JPY trading at 100 means that 1 USD = 100 JPY.

##### Calculating Indirect Rate Pip Value

Pip value for indirect rates are calculated according to the following formula:**Formula: pip = lot size x tick size / current rate**

Example for 100,000 USD/JPY contract currently trading at 100.254:

1 pip = 100,000 (lot size) x .01 (tick size) / 100.254 (current rate) = USD $9.97

##### Calculating Indirect Rate P/L (Profit/Loss)

Calculating P/L for indirect rates is calculated as follows:**Formula Selling price - Purchase price = P/L**

Example for 100,000 USD/JPY contract initially bought at 100.254

hen closed at 100.508:100.508 (purchase price) - 100.254 (selling price) = 25.4 pip profit

To further convert the above P/L to USD, use the above "Calculating Indirect Rate Pip Value" as follows:

1 pip = 100,000 (lot size) x .01 (tick size) / 100.254 (current rate) = USD $9.97

Therefore: USD $9.97 (pip value) x 25.4 (pip gain) = USD $253.24

#### CROSS RATES

Currency pairs that do not involve the USD are referred to as cross rates. Even though the USD is not represented in the quote, the USD rate is usually used in the quote calculation. An example of a cross rate is the EUR/GBP. Again, the EUR is the base currency and the GBP is the quote currency.

##### Calculating Cross Rate Pip Value

Pip stands for "price interest point" and refers to the smallest incremental price move of a currency. Tick size is the smallest possible change in price. The base quote is the current base pair quote. Pip value for cross rates are calculated according to the following formula:**Formula Pip = lot size x tick size x base quote / current rate**

Example for 100,000 EUR/GBP contract currently trading at .6750, and EUR/USD currently trading at 1.1840:

1 pip = 100,000 (lot size) x .0001 (tick size) x 1.1840 (EUR/USD base quote) / .6750 (current rate) = USD $17.54

##### Calculating Cross Rate P/L (Profit/Loss)

Calculating P/L for cross rates is calculated as follows:**Formula Selling price - Purchase price = P/L**

Example for 100,000 EUR/GBP contract initially sold at .6760 then closed at .6750:

.6760 (selling price) - .6750 (purchase price) = 10 pip profit

To further convert the above P/L to USD, use the above "Calculating Cross Rate Pip Value" as follows:

1 pip = 100,000 (lot size) x .0001 (tick size) x 1.1840 (EUR/USD base quote) / .6750 (current rate) = USD $17.54

Therefore: USD $17.54 (pip value) x 10 (pip profit) = USD $170.54 profit