Trading of currency provides a profitable and challenging chance for the well-educated depositors. However, it is regarded as a dangerous market and the dealers should remain cautious regarding the positions of trading. The failure or success of a dealer is calculated in accordance with the gains and losses on her or his trades. It is significant for the dealers to have a proper understanding of the P&L, as it affects the balance of margin in a direct manner that they have in the account of trading. If costs move against you, the margin balance starts reducing and one will have little money found for trading.
Unrealized and realized gain and loss
All the overseas exchange trades are marked to the market in actual time. The calculation of market to market depicts an unrealized L&P in the trades. This term “unrealized” signifies that deals are still now open and which can be easily closed at any point of time. Marking to the market charge is regarded as a value at which one can close the trading at that specific moment. If one has a long position, mark to the market calculation generally is the cost at which one can sell. As far as short position is concerned, it is the cost at which one can purchase for closing a position.
Until the position gets closed, the L&P remains to be unrealized. The loss or profit is calculated when one closes the trade position. When one closes the position, the loss or profit starts fluctuating as the cost of the trades starts changing in a constant manner.
Measuring the gains and losses
The real calculation of gains and losses in the position is really simple. For calculating P& L of the position, the thing that one needs is the size of the position and by how much pip the piece has been increasing. The real loss or profit is generally equal to the size of the position which is then multiplied by a pip movement.
Let’s have a look at one example
Think that one has 100,000 USD/GBP positions presently trading at nearly 1.6240. When the cost moves from USD/GBP of 1.6241 to 1.6254, the costs have increased by fifteen pips. For about 100,000, USD/GBP position, the movement of fifteen pips equalizes to 150 USD.
For determining if it is a loss or gain, we should be aware of the fact that we were short or long for every trade.
Long position: As far as long position is concerned, if the costs increase, this will be regarded as a gain and if the cost moves down, this will be a great loss. In the first example, if a position is long USD/GBP, this is a gain of 150 gain. Alternatively, if the costs had moved towards down from USD/GBP of 1.6240 to about 1.6220, it will be the loss of 200 USD.
Short position: In the short position, when costs increase, this will be a great loss and on the other hand if the costs start moving down, this will be regarded as a huge gain. In the similar instance, if one has a short USD/GBP position and the costs increased by nearly fifteen pips, which is a great loss of 150 USD. If the costs move down by twenty pips, this will be a 200 gain USD.
Another important aspect of P&L is currency in which this is denominated. In the example provided by us, P&L was then denominated in the form of dollars. However, it might not be the case always. In our instance, the USD/GBP is quoted in accordance with the total number of USD for each GBP. It is a base currency and the USD is regarded as quote currency. As a common rule, P&L would be for sure denominated in a quote currency therefore, if it is not present in USD, one will need to convert this into USD for the calculations of margin.
You should consider having 100,000 small positions on CHF/USD. In such a case the P&L is denominated in the Swiss Franc. The existing rate is roughly estimated at 0.9129. As far as the standard lot is concerned, every pip will be a worth of CHF ten. If the cost moves down by ten pips to nearly 0.9119, this will act as a gain of 100 CHF. For converting the P&L in the form of USD, one should divide P&L by the CHF/USD rate. Once you have all the P&L values, they can be simply used for calculating the balance of margin found in a account of trading. The calculations of margin are simply calculated in USD.
You should perform these types of calculations manually as all the accounts of brokerage automatically measures P&L for all the deals. However, it is significant that you should understand the calculations as you need to measure the requirements of P&L and margin while building deals even prior to making an entry to the trade. Based on the amount of leverage the trading account provides, one can measure the needed margin for holding the specific position.
With a proper understanding of the amount of money is at a stake in every deal will help in managing the risk in an effective manner.