1.22 How to Calculate Profit & Loss for Forex Trade

Forex profit calculation.
Let’s take a look at a Forex deal we want to pull off and try to work out the profit or loss on the deal. Working that out should be a snap with your new found knowledge of leverage, lots and pips!
Let’s say you turn bearish on the GBP after a news release and are looking to go short on the GBP/USD pair.
Taking FX trade position. 
In the quote panel of your trading panel (shown above) you see the pair at 1.56947/1.56973. If you want to short the pair you have to sell the base currency on the ‘bid’ side of the quote, which is 1.56947, and you do so for 1 standard lot totaling 100,000 units.
After a while the quote panel shows you this:
Closing the trade to take profit.
 You see that your position has turned in a profit as the price has fallen to 1.56717/1.56742. You like the price, and since you want to close your trade, you buy 1 standard  lot at the ‘ask’ rate of 1.56742.
The difference between your sale and buy back is 1.56947-1.56742 or 20.5 pips (remember the fifth decimal place is a fractional pip or a pipette). The value per pip being $10, the profit on the trade is 20.5 x $10 = $205.00.

Rollover in Forex 

Interest rate calculation when rolling over the trade to the next day..Let’s say you closed the above trade within the day itself. What if you wanted to hold it longer, say for a couple of days?
Then you would need to ‘rollover’ your trade. This is the process of extending the settlement date of a position that remained open as at 5:00 pm EST. You would normally be required to effect delivery of the currency two days after the transaction date. However, you may elect to roll over the position by closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day – by this means you can artificially extend the settlement period by one day. What you are doing is borrowing one currency to buy another. For this facility, you would earn or pay a daily rollover interest rate. Interest is payable on the currency borrowed, and earned on the currency that has been bought.
If you who took a long position in a high-interest currency compared to the currency that you borrowed, you will receive an amount of interest in your account. Conversely, you will need to pay interest if the currency you borrowed has a higher interest rate compared to the currency that you purchased. If you do not want to collect or pay rollover interest then you should close out all positions by 5pm ET. The chart below gives the interest rates prevailing on the major currencies as on December 23, 2011. For a minute let's assume that these rates are applicable for your trade though for the rollover the short-term interest rates are considered.
In the above trade example you had short-sold GBP/USD i.e. you had sold GBP and had bought USD.
As per the interest rate table on the left handside, GBP interest rate is 0.50% and USD interest rate is 0.25%. That means you bought a currency with lower interest rate and sold a currency with higher interest rate. The result will be that you will be losing some money on the interest rate for your position of 100,000 units.
If you rolling over your position by another day then your loss on interest rate will be 1 day interest on your 100,000 units.

Rollovers - Interest Rate Calculation

In order to calculate the rollover interest, we need the following:
  1. Short-term interest rates on both currencies
  2. The current exchange rate of the currency pair.
  3. Position size i.e. the quantity of the currency pair purchased. 
In our above example you had bought 100,000 units of GBP/USD. The interest rate for GBP is 0.50% and for USD it is 0.25%. Let's say the current interest rate is GBP/USD = 1.5694.
The interest you will lose for 1 day = [{100,000*(0.50%-0.25%)}/(365 days*1.5694)] = $43.64.
Please note that the interest rates are quoted for 1 year and hence the division by 365 came into the calculation for calculating the interest rate for 1 day.
In case you had bought GBP/USD instead of short-selling it, you would have had a currency with higher interest rate and in that case you would have earned USD 43.64 rollover interest in addition to any profits made if the price of GBP/USD would have gone up.

What is Short-term interest rates?

Short-term interest rates are the rates at which short-term borrowings or trade transactions are effected between financial institutions or the rate at which short-term government paper (e.g. bonds) is issued or traded in the market. The other terms used for short-term interest rates are "Money Market Rate" and "Treasury Bill Rate".
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