A very important skill forex traders must know is to calculate their profit and loss margin. Foreign exchange market is highly unpredictable and can give equal profitable as well as loss opportunities. It is a must for a forex trader to know their risk tolerance and keep a track of their profits and losses.
The calculation of profit and loss margin is usually offered in the services provided by forex brokers and online trading platforms where they automatically calculate these for you, which makes the task easier, however in order to actually go for a trade one must know beforehand how much profit or loss they might potentially face while making that decision. It is extremely crucial for forex traders to know how to calculate their profit and loss margin to avoid facing troubles later.
An easy way to calculate your profit and loss margin is to multiply the position size by the number of pips the price has moved. For example, you have a 100,000 EUR/USD position currently trading at 1.2156. If the prices moved from EUR/USD 1.2156 to 1.2166, then they jumped 10 pips. For a 100,000 EUR/USD position, the 10-pips movement equates to $100 (100,000 x .0010).
In order to know if the calculated price is profit or loss, we need to know what type of trade it was, long or short. Keeping in mind our example, if we were at a long position and prices moved up, $100 is a profit, but in the same situation if the prices have dropped down from EUR/USD 1.2156 to 1.2141, this will be a loss case with $150 (100,000 x -0.0015). Similarly, in the case of a short position for example, if the prices move up, it will be a loss, and if the prices move down it will be a profit.
These are the basics of forex trading. Every trader must have a command on it, but one does not need to get too worried as these calculations would be done for you automatically by your forex broker platform.