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.