How does a forex trade make or lose money?

You open a trade at one price and close it at another. The gap between the two, multiplied by the size of the trade, is your result before costs.

Costs come out of that, and what is left lands in your balance. All prices in this lesson are round illustrative numbers, not live quotes.

What decides whether a trade makes money?

Direction comes first. If you buy a pair, called going long, you gain when its price rises. If you sell it, called going short, you gain when the price falls.

Distance is counted in pips: 0.0001 on most pairs and 0.01 on pairs quoted in Japanese yen. Size is counted in lots, and one standard lot is 100,000 units of the base currency.

Your gross result is the price change times the number of units traded, before any costs. For a long trade the price change is the closing price minus the opening price.

For a short trade it runs the other way, opening price minus closing price, because you sold first and bought back later. A negative answer is a loss.

The result comes out in the quote currency, the second currency in the pair. If your account is held in a different currency, the broker converts it at the current rate.

How does a long trade make or lose money?

Say EUR/USD shows a bid of 1.10000 and an ask of 1.10010, a spread of 1.0 pip. You expect the euro to rise, so you buy 0.10 lot, which is 10,000 euros.

You buy at the ask and will later sell at the bid, as the bid and ask lesson explains. So the ask is your entry, and the bid is the price to watch.

1. Work out the pip value: 10,000 × 0.0001 = $1.00 per pip.
2. Open at the ask, 1.10010.
3. Later the bid reaches 1.10410, and you sell to close: 1.10410 − 1.10010 = 0.00400, which is 40 pips.
4. Gross result: 40 × $1.00 = +$40.00.
5. Had the bid fallen to 1.09710 instead: 1.09710 − 1.10010 = −0.00300, which is −30 pips.
6. Gross result: −30 × $1.00 = −$30.00.

Nothing in the setup changed between the two cases. The entry, the trade size and the pip value were identical, and the move after entry decided the sign of the result.

How does a short trade make or lose money?

A short trade uses the same sum in reverse. Say USD/JPY shows a bid of 150.00 and an ask of 150.01, and you expect the dollar to fall against the yen.

1. You sell 0.10 lot, which is 10,000 US dollars, at the bid of 150.00.
2. Work out the pip value: 10,000 × 0.01 = ¥100 per pip.
3. Later the ask falls to 149.50, and you buy to close: 150.00 − 149.50 = 0.50, which is 50 pips.
4. Gross result: 50 × ¥100 = +¥5,000.
5. In a US dollar account, the broker converts at the current rate: ¥5,000 ÷ 149.50 = $33.44.

Had the ask risen to 150.30 instead, the sum would be 150.00 − 150.30 = −0.30, a loss of 30 pips or ¥3,000. At 150.30 that is ¥3,000 ÷ 150.30 = $19.96.

The yen amounts are exact. The dollar amounts depend on the exchange rate at the moment the broker converts them.

What do trading costs take from the result?

The spread costs you through the prices themselves. It is already inside the 40 pips above, because you entered at the higher ask and left at the lower bid.

A commission is a fee per lot that some account types charge on top of the spread. Assume an illustrative $6 per lot for the round trip, open plus close. On 0.10 lot that is $0.60.

Swap is interest charged or paid when you hold a position overnight. It can be a charge or a credit, and it changes over time. Assume an illustrative charge of $0.40 per night for 2 nights, which is $0.80.

On the winning long trade, $40.00 − $0.60 − $0.80 = $38.60 reaches your balance.

The same costs apply to the losing case, so they make a win smaller and a loss bigger:

A rebate paid per lot through an introducing broker, such as the one described on the Exness rebate page, lowers your net cost on every trade.

How far must price move before you break even?

Right after you buy, the bid is still 1.10000, 1.0 pip below your entry. If you closed at once, you would lose the spread: 1.0 pip, or $1.00.

Commission widens the gap. $0.60 on a pip value of $1.00 is 0.6 pip, so the bid must climb 1.6 pips from where it stood when you bought, to 1.10000 + 0.00016 = 1.10016.

Each night of swap at $0.40 raises that level by another 0.4 pip. Holding for 2 nights would move breakeven to 1.10024.

Costs weigh most on small targets, because they stay the same while the target shrinks. On a 5 pip gain of $5.00, the $0.60 commission takes 12%. On a 40 pip gain it takes 1.5%.

How do floating profit and leverage change the picture?

While a trade is open, its result is a floating profit or loss: the platform recalculates it at every price change. It becomes a fixed amount in your balance only when you close.

Leverage sets how much margin you need, the deposit the broker holds while the trade is open. On 0.10 lot of EUR/USD at 1.10010, the position is worth 10,000 × 1.10010 = $11,001.

At an illustrative leverage of 1:100, the margin is 11,001 ÷ 100 = $110.01. Pip value stays $1.00 on this trade at any leverage.

In a $500 account, the $31.40 net loss on 0.10 lot is 6.3% of the balance. Higher leverage lets the same account open a bigger trade, and the same 30 pip fall on 1.00 lot would cost $300 before costs, which is 60% of $500.

Every example here filled at the quoted price. In fast markets an order can fill at a worse price, called slippage, and a stop loss can close a trade beyond its level when the price jumps over it.

The profit and loss calculator repeats these sums for any pair and size, though it cannot tell you which way the price will move next.

Keep learning

Chapter 2When do you buy or sell a currency pair?02You buy a currency pair when you expect the first currency, the base, to strengthen against the second, and you sell when you expect it to weaken. If your view is about one currency, find which side of the pair it sits on: a weaker quote currency pushes the pair up, so you buy.Chapter 2What is a pip in forex?03A pip is the standard step traders use to measure price moves. On most currency pairs it is 0.0001, the fourth decimal place, and on pairs quoted in Japanese yen it is 0.01. A pipette is one tenth of a pip. On one standard lot of EUR/USD, each pip is worth $10.Chapter 2What is a lot in forex?04A lot is the unit used to set the size of a forex trade. One standard lot is 100,000 units of the base currency, a mini lot is 10,000 and a micro lot is 1,000. On EUR/USD that makes each pip worth $10, $1 and $0.10. Other instruments, such as gold, use their own contract size.Chapter 2What is the spread in forex?05The spread is the gap between the bid price you can sell at and the ask price you can buy at. You pay it on every trade, the moment you open it. On EUR/USD it is often one or two pips or less, and it widens around the daily rollover, the weekly open and big news.Chapter 2What are the bid and ask prices in forex?06Every forex quote has two prices. The bid is the price at which you can sell, and the ask is the higher price at which you can buy. The gap between them is the spread. You buy at the ask and close at the bid, so every new trade starts slightly behind by the size of the spread.Chapter 2Forex terms you will hear every day.07The everyday words of forex describe what a trade is doing and what it costs. Long means you bought, short means you sold. A pip is the standard price step, a lot is the trade size, the spread is the gap between bid and ask, and margin is the deposit your broker holds while a trade is open.Chapter 2What types of orders can you place in forex?08A market order buys or sells straight away at the current price. A pending order waits for a price you choose: a limit order waits for a better price, and a stop order joins a move once price breaks a level. Stop loss and take profit orders close an open trade at prices you set in advance.Chapter 2Forex order types cheat sheet.09A market order fills now at the current price. A limit order waits for a better price: a buy limit below the market, a sell limit above it. A stop order waits for a worse price: a buy stop above, a sell stop below. Buy orders trigger on the ask, sell orders on the bid.Chapter 2What is a forex demo account, and how should you use it?10A forex demo account is a practice account funded with virtual money. You trade on the broker's platform with live or near-live prices, so you can learn orders, stops and margin without risking your own cash. Set it up with the balance and leverage you would really use, and expect live fills and feelings to differ.Chapter 2Can you get rich trading forex?11A few people make large sums trading forex, but the loss figures that EU and UK brokers must publish show that most retail CFD accounts at those brokers lose money. Getting rich would need a large starting balance and years of steady returns. Small accounts chasing big targets usually take risks large enough to wipe them out.Chapter 2Forex basics cheat sheet: pairs, pips, lots, leverage and margin.12This cheat sheet sums up the forex basics chapter on one page. Each idea gets a short summary, its formula and a link to the full lesson. The quick reference tables let you check pip sizes, pip values, contract sizes and margin before you place a trade, and one worked trade ties everything together.