Unlike stock, futures, or options markets, calculating profits in the foreign exchange market can be a bit more complex. This is because you have to transfer profits from the foreign currency you bought back to your home currency.
The best way to understand this concept is to use an example. Let's say you have $ 10,000 and the EURUSD is at 1.5000. This means that you buy $ 1.5000 with 1 euro – or vice versa with $ 0.667 (1 / 1.5 = 0.666). With your $ 10,000, you can buy about 6,666.66 euros.
Let's say the EURUSD exchange rate rises to 1.5500, which means that you can now buy $ 1.5500 with one euro. Since the euro has grown in value since you bought it, you can now sell your euro for more dollars than you originally bought with it. In other words, you've made a profit!
To realize your winnings, all you have to do is convert the $ 6,666.66 you have now into US dollars. Since you are buying $ 1,5500 with one euro, you can simply multiply your euro amount – 6,670 – by the exchange rate (1,5500). The result is 10,333.33. So you did it – a profit of $ 333.33!
Profit from selling a currency (also known as "going short")
Transactions where you are short selling – in other words, where you think the exchange rate will go down – are somewhat more involved. In such a scenario, that's what you're actually doing Borrow The currency you believe will lose value. So let's say you borrow the equivalent of $ 10,000 if the EURUSD is trading at 1.5000. This means that you borrowed approximately $ 6,666.66 and used these borrowed funds to buy $ 10,000.
Now let's say the exchange rate drops to 1.4500 and you decide that you want to end the trade. To do this, you simply want to exchange the $ 10,000 you bought for euros at the new exchange rate. At a price of 1.4500 euros, you buy 6,896.55 euros for 10,000 US dollars. You now have to pay back the originally borrowed € 6,666.66 and have € 229.89 left. You would then like to convert this back into US dollars – your home currency – which is at an exchange rate of 1.4500.333.33. This is your profit from trading.
As you can see, forex transactions can be a bit more complex than typical stock or futures transactions – but if you go step by step you will find that they are just a few simple math equations.