How to make profits from trades
Already two ways of making money have been discussed in Level 1. They included profit that’s made on trades and interest paid/collected at the end of the day when the work hours end. The latter is a secondary method of making money.
The primary method of earning profit in fx is through the positions held and trades made. This lesson will explain that primary profit earning method and expand on the two ways this is achieved.
Before getting into the mechanics of trade it is important to understand two key terms; going long and going short
If the currency pair under consideration is EUR/USD, then ‘going long’ would mean that the trader is buying EUR against USD. So they are buying Euros with US Dollars.
On the other hand, ‘going short’ would mean they are selling i.e. they are selling Euros to buy US Dollars. Take a minute to absorb these ideas and let’s see how a trader makes profit from these two types of deals.
Buy low and sell high- that is the goal here.
If EUR/USD is 1.3510 at the time of your buying, you want it to have reached 1.3540 before you sell (this is just an example increase in rates is not always predictable or calculable necessarily).
This increase in rate would mean that you were able to make a profit corresponding to the difference in pips. Here they went from 10 to 40 so we’re looking at an increased rate by 30 pips. Whatever the dollar value per pip is at that time, that’s what our profit will be. More on that later.
Closing the deal means selling the currency that you bought. So now that you sell your standard lot of Euros, you will get more dollars in return. That is your profit.
Sell high and buy low- the goal here.
This is the same thing except it’s happening in reverse order. You think a particular currency rate is going to depreciate against another. So you sell that currency at the high present rate. If your prediction comes true and the value actually goes down then you can buy it back at a lower rate.
For example, assume that EUR is expected to depreciate against USD. At the time that you enter the trade it is at 1.3540 so you enter by selling a standard lot of EUR. However, over a course of period the rate goes down to 1.3510. It fell by 30 pips. So you buy the lot back and close the deal.
What happened here is that when you were paid US dollars for your Euros you were paid X amount. Now when you paid to get those same Euros back you only paid X-30. That 30 pip difference is your profit.
How to calculate profit?
Profit in trade, no matter long or short, can be calculated through a simple formula.
In the above given formula, ‘the number of pips’ means the difference in the pip value (in both the examples above it was 30).
‘Value per pip’ is the actual rate per pip. For example, for the most active pairs in which USD is involved, this value is $10. This means that for each pip change the trader makes/loses $10. This is for a Standard Lot (100,000 units).
‘Number of Lots’ here represents the number of Standard Lots traded.
Keeping the above example in mind and assuming that we were trading 1 Standard Lot, at a rate of $10 per pip the profit can be calculated thus:
Remember that with experience and learning you can maximize your profits, sure, but there will not come a time where you will never face loss again. Therefore, it is better to be safe than sorry and manage those losses. Read on to learn how.