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Profit and Loss in Forex Trading

The foreign exchange market is a 24-hour financial market where various currencies are bought and sold freely. A forex trader can buy US Dollars in exchange for Euros, and vice versa. There are also other major currencies that you can concentrate your trading upon, such as the Japanese Yen, the Australian Dollar and the Swiss Franc. You can even trade using lesser-known currencies.

Since the currency values fluctuate anytime, forex trading is sometimes volatile and risky. That is why you have to understand the basics of currency trading, such as how to compute profits and losses in forex trading.

Your probable profits and losses in forex trading are dependent on the exchange rates between the two currencies (or currency pair) you are buying and selling. Forex quotes are expressed in terms of the currency pair and a five-digit value. For example, the forex quote EUR/USD = 1.2184 means that one Euro is equivalent to 1.2184 US Dollars.

The first currency shown in the forex quote (the one before the /) is called the base currency and has a value of 1. The other currency is called the counter currency. The currency with the greater value in the exchange rate (in this case it is the Euro) is usually considered as the base currency.

To show how you can make money from the foreign exchange market, suppose that the exchange rate between the Euro and the US Dollar is EUR/USD = 1.2184. Suppose that you buy 1,000 Euros and you pay $1,218.40.

Several weeks later, the forex rate is now EUR/USD = 1.3652. You then sell the 1,000 Euros you have for $1,365.20, resulting in a profit of $146.80 for the transaction ($1,365.20 - $1,218.40 = $146.80).

If however, you wait for several more weeks and then you see that the exchange rate has fallen to EUR/USD = 1.1603. Your trade has now resulted in a loss of $58.10 ($1,160.30 - $1,218.40 = $58.10).

Just like any other investment such as stocks and treasury bonds, there are also risks involved in forex trading. If you are not very careful and intelligent in your transactions, you will find yourself losing a lot of money from failed trades. You can make up for any deficiency by reading books and articles about forex trading and by attending seminars and training courses.

Forex trading promises a big return of investment due to the high level of risk involved, so your goal is to balance risk and security to achieve consistent profits in forex trading.