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Profit and Risk Assessment

Calculating Profit and Assessment for Transactions: a Number of Examples

How big is the risk meanwhile what is the amount of profit you can anticipate? Look into thorough calculations both of possible profits and risks by means provided examples of certain transactions.

Current results of non-closed transactions and profit or losses already registered are always exactly displayed at the trading terminal installed to your PC or PPC. Therefore, in ordinary situations you can to calculate approximately potential profit and risks for every transaction to make a proper forecast for its possible consequences. A simple empiric rule applies here: for the main part of currency pairs for trading 1 standard lot, 1 point “value” is equal to about 10 US dollars. It means that if at the moment of opening transaction, we expect to gain profit equal to 100 points and trade 2 lots, we can approximately calculate our prospective profit as 2 lots х 100 points х \$10 = \$2000.

The same simple method may be used in assessment of the risk of losses when effecting this transaction. If opening a transaction, we place a protective stop-loss at the distance of 40 points from the opening price, then risk will be as follows: 2 lots х 40 points х \$10 = \$800. Risk can be reduced trading with 1 lot. In such a case maximum possible loss will be: 1 lot х 40 points х \$10 = \$400. However, reducing risks, a trader reduces his profit at the same time.

“10-dollar”- rule accurately applies for such popular currency pairs as EUR/USD and GBP/USD: 1 point with 1 lot is equal here to \$10 exactly. In fact, it will be so for any currency pair, where US dollar ranks the second, provided that 1 lot amount is equal to100 000 units of the first currency. According to the above-mentioned example, 1 lot is equal to 100 000 euros and 100 000 pounds respectively. And for AUD/USD (Australian dollar/US dollar) pair, each point is 1,5 times more expensive and is equal to \$15, and not \$10, because the standard lot is equal to 150 000 Australian dollars (“ozzies”), not 100 000.

1 lot is also equal to 150 000 units for the pairs USD/CHF (dollar/Swiss franc) and USD/CAD (US dollar / Canadian dollar). However, point value calculations for such pairs are bit more complicated like for all pairs where dollar ranks the first currency. In general terms, the result of any transaction can be calculated according to the formula:

Profit / Loss = lot amount х number of lots х (sales price – purchase price).

However, it is important that the result of such calculations is expressed in the second currency, not measured in US dollars. For example, a 50 point movement for USD/CAD pair leads to the following result. If the transaction of 1 lot was opened to effect purchase at 1, 0600, and after a period of time the transaction was closed at 1, 0650, then the transaction result is: 150 000 х 1 х (1, 0650 – 1, 0600) = 750 Canadian dollars. To re-calculate the result into US dollars we have more accustomed (and usually all calculations are carried out in dollars in the trading program), we divide 750 Canadian dollars by the current quotation USD/CAD at the moment of closing the transaction; that is to say, by 1, 0650. The result is: 750: 1, 0650 = \$704, 23. In order to calculate an average value of 1 point, we divide the result by 50 points, and, therefore, the result displays that 1 point “value” was \$14, 08. However, 1 point value is always different, because the exchange rate USD/CAD always floats. If Canadian dollar is going up, each point will cost more. If “Canadian”, on the contrary, falls, then point will go down in value to some extent. The same effect will be displayed for any other currency pair, where another currency, not US dollar ranks the second.

The same statement refers to the pairs with participation of the Japanese yen, which always ranks the second, however, 1 point value for yen usually varies within \$9–11, that is to say, about the same \$10. The very similar calculation system applies to cross rates- currency pairs without US dollar. The result is always in the second currency, after which it is calculated into US dollars.