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Forex Profits

By: EconomyWatch Date: 23 July 2009

The core Content Team our economy, industry, investing and personal finance reference articles.

EconomyWatch, Content Team

Traders in the currency market realize forex profits when they are able to sell a currency at a price higher than the purchase price. While that may sound simple, making money in the forex market is anything but easy. It needs knowledge of the market, analysis, discipline, money management and an understanding of the market psychology.

Forex profits may be:

Unrealized: If a currency is trading at a price higher than the purchase price, but the trader has not closed the position (in the hope of realizing higher profits), the trader is said to have made unrealized profits.
Realized: When the trader has closed his position at the price higher, he is said to have made realized profits.

Determining forex profits on a trade is simple and depends on the opening and closing values.

Following is the formula to calculate profits on a forex trade, where the US dollar is the base currency:

Profits = [(R2/R1) – 1] x Units

where,

R1 = the opening rate

R2 = the closing rate

For example, if you have bought US$100,000 at JPY110 and sold the same at JPY111, then your realized profits are:

Profits = [(111 / 110) - 1) x US$100,000 = $909.09

If your trade involves a base currency other than the US dollar, then the profits can be calculated by:

Profits = Units x (R2 - R1)

For example, if you have bought EUR100,000 at US$1.4500 and sold the same at US$1.4600, then your profits from the trade are:

Profits = US$100,000 x (1.46 - 1.45) = $1,000

Traders must be aware of the following critical elements needed to realize forex profits:

Educate yourself about all aspects of the forex market.
Manage your money. In the forex market, it is very easy to use excessive leveraging, which could ultimately result in heavy losses, wiping out your entire account.
Learn to accept losses. Losses are a part of forex trading. However, the key is to keep your losses minimal and letting your profits run.
Refer to a set of rules and discipline whenever you face a psychological battle during trading. Following these rules will help you in times of doubt.