Calculating profit on a forex trade, I don't get it :(

From Oanda:
fxtrade.oanda.ca/analysis/profit-calculator/how

Example 2:

You see that the rate for USD/JPY is 115.00/05 and decide to buy 10,000 USD. Your trade is executed at 115.05.
10,000 USD115.05= 1,150,500 JPY
You bought 10,000 USD and sold 1,150,500 JPY.
The market rate of USD/JPY falls to 114.45/50. You decide to sell back 10,000 USD at 114.45.
10,000 USD
114.45=1,144,500 JPY
You bought 10,000 USD for 1,150,500 JPY and sold 10,000 USD back for 1,144,500 JPY. The difference is your loss and is calculated as follows: 1,150,500-1,144,500= 6,000 JPY. Note that your loss is in JPY and must be converted back to dollars.
To calculate this amount in USD:
6,000 JPY/ 114.45 = $52.42 USD or
6,000 *1/114.45=$52.42

Question … why is it 6000 / 114.45 and not 6000/114.50??? Aren’t I trying to buy USD and sell the JPY profit I have? Shouldn’t I be using the market sale/ask price of the pair rather than the bid price?

1 Like

You went LONG the USD/JPY pair on a BID/ASK quote of 115.00/05.

Using loose BUY/SELL terminology, [B]you “bought” the pair at the ASK price of 115.05.[/B]

The USD/JPY declined in value, resulting in a BID/ASK quote of 114.45/50.

At that point you exited your trade; [B]you “sold” the pair at the BID price of 114.45.[/B]

Your [B]loss[/B] on this trade is figured on your exit price of 114.45.

I don’t know what you mean when you refer to “the JPY profit I have.” There is no profit (for you) in this trade (although your broker made a profit).

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The terminology used in your example is highly misleading.

When you take a position in the [I]retail[/I] spot forex market, you do not “buy” the base currency, and “sell” the quote currency (or vice versa). And you don’t actually “buy” or “sell” a currency pair, either. Rather, you take a speculative LONG or SHORT position in the exchange rate between two currencies.

We all use the “buy” and “sell” terminology, because it’s easier than using the accurate terminology. But, plant this idea in your mind: [I]In the retail market,[/I] there is no buying or selling of individual currencies, or of currency pairs. The actual buying of one currency, and simultaneous selling of another currency, happens at the interbank level, [I]which is not where we retailers do our speculating.[/I]

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There is another way to calculate the loss you suffered in your trade.

Using the inaccurate “buying” and “selling” terminology —

you bought USD/JPY at 115.05 and sold at 114.45, for a 60-pip loss.

How much did those 60 pips cost you?

The value of 1 pip in this pair, as of the close of your trade, was —

$100 Ă· the BID price of USD/JPY = $100 Ă· 114.45 = $0.8737 (rounded off).

So, 60 pips cost you 60 x $0.8737 = $52.42

.

Sorry, I meant “profit of -6000 jpy.” :smiley:

Anyways, thanks for the attempt, however that’s not my experience when using interactive brokers which is an ECN. The profits and losses are expressed in the quote currency which jives with the terminology that Oanda uses (and a book I read plus sites like investopedia)

Also, again i really do appreciate the attempt, but your answer seems to completely misunderstand the question. I understand how the profit (loss) was expressed in the quote currency, what I don’t understand why it’s using the bid versus the ask to convert to USD.

In the example you made a [I]loss [/I]of 6,000 JPY not a profit. And you need to convert that JPY loss to a USD loss, therefore you are [I]buying [/I]JPY and [I]selling [/I]USD not [I]selling[/I] JPY, I think?

This is certainly right, and simply by inserting another sentence in the explanation on their “examples page”, Oanda could easily have made that much clearer (and should have, in my opinion).

Not sure why so many traders:

  1. Are placing trades when they do not understand the difference between bid/ask prices (not saying that a trade was actually placed, but you all know what I mean) and when they apply.

  2. Why so many are confused when to use bid/ask.

Clint gave a great explanation and those who do not get it need to really roll back and spend some serious time educating themselves (which is what they may or may not do here in this forum).

LOL, TheLastBear! No worries my friend, the point of this post was to make sure I understood all the details before real trading. But I really do appreciate your deep concern for my well being!

Thanks Manxx, it’s very obvious now.

Just one more thing… want to make sure I have this right. If AUD/USD has bid ask of 0.71999/ 0.72032, that implies there is another pair USD/AUD which has a bid ask of (1/aud_usd_ask) / (1/aud_usd_bid) … right??? Sorry for all the dumb questions

Cheers

Think it’s hard to understand the answer when you never understood the question in the first place.

Hint, we’re trading derivatives bro. A financial product based on an asset. No-ones buying or selling anything.

bobbillbrowne, not sure that’s correct. I worked out all he math and Manxx was definitely correct! You have to buy back the JPY you’ve lost.

Also, have you tried trading on an ECN like IB? You actually end up with your quote currency after trading.

What happens is people use market maker bucket shops so much I think they miss out on all the things actually going on behind the scenes.

Hmmm, well I only managed to count one person here who asked a genuine question about a very basic issue. I am not sure where the others are that constitute “so many”?

Sure, one shouldn’t be live trading without an understanding of these basic issues - but then isn’t that one of the reasons why Babypips exists? So that newcomers to the business can feel free to ask even the most basic questions without feeling inadequate or inferior?

Maybe I’ve misunderstood something about the purpose of this site?

Bro, a hate to break it to you but your still trading OTC derivates. And your IB brokers is still a market marker. This from one of their many PDS

Prices quoted on IB’s system generally reflect the prices at which IB’s FX Providers arewilling to trade. Prices quoted on IB’s system reflect changing market conditions andtherefore quotes can and do change rapidly. As such, when your order is received andprocessed by IB’s system, the quote on IB’s platform may be different from the quotedisplayed when the order was sent by you. This change in price is commonly referred to as “slippage". IB generally will not execute your order at a certain price unless IB is ableto trade at that price against one of IB’s FX Providers. If you send an order for an FX transaction to IB’s system but your requested price is no longer available and therefore the order is non-marketable, IB will not execute the order, but will place it in IB’s limit order book in accordance with your time-in-force instructions. IB may execute the order if it becomes marketable based on prices received from IB’s FX Providers. If you send an order for an FX Contract to IB’s system and the current price is more favourable for you than what you have requested in the order, the order will generally be executed at the available better price.

Although IB attempts to obtain the best price for your orders on FX Contracts, because ofthe inherent possibility of transmission delays between and among yourself, IB and FXProviders, or other technical issues, execution prices may be worse than the quotesdisplayed on the IB platform.

To execute your order, IB engages in back-to-back transactions with one or morecounterparties. These counterparties on occasion may cancel or adjust FX trades with us Product Disclosure Statement12in the event of market or technical problems. In these cases we may have to cancel oradjust FX Contracts that you have executed.

Your “trade” is with IB as your counterparty.

[B]Nature of Foreign Exchange Transaction between Customer and IB.[/B]

When you enter into an FX Contract on IB’s platform, IB, as the counterparty to your trade, may effectuate that transaction by entering into an offsetting transaction with one of IB’s affiliates, with another customer that enters quotes into IB’s system, or with a third party bank (IB’s “FX Providers”). In such transactions, the FX Provider is not acting in the capacity of a financial adviser or fiduciary to you or to IB, but rather, is taking the other side of IB’s offsetting trade in an arm’s length contractual transaction.

[B]You should be aware that the FX Provider may from time to time have substantial positions in, and may make a market or otherwise buy or sell instruments similar or economically related to, the FX Contracts entered into by you. IB’s FX Providers may also undertake proprietary trading activities, including hedging transactions related to the initiation or termination of FX Contracts with IB, which may adversely affect the market price or other factors underlying the FX Contract entered into by you and consequently, the value of such transaction.[/B]

Now I did write a big section with a working example but I can’t be … Clint can explain this things far better than me. And the one he gave here is pretty damn good. But I ask this question of you. If you calculating profit/loss in USD then your base currency is USD. Where did you get your yen from to sell in the first place? And you think your own something. Who holds your contract? I just see you waving a ticket at me?

well sure, we can have that debate but it was completely orthogonal to the reality that you end up with your quote currency after a trade. You need to understand the conversion math if you want to be accurate, which is what I’m doing here.

I’m sure you guys want to make this discussion about something that it really isn’t. Why I don’t know. I just wanted to understand how the math works. I appreciate those that took the question seriously as it helped me find a very annoying bug in my code.