Profit and Loss calculation doubt!

Beginner Questions
1

Hi you all, I just started the school of pipsology. And I got confused when trying to calculate profit and loss

In the picture below shows how you make $700 of profit only by adding up the numbers in the right after closing the trade.


but in this next picture below, i have to calculate the value of one pip and then based on that value calculate the profit.


If i use the first ‘method’ in the second picture, my profit would be $200, no $137 as it suggests [buy 100k USD for (-)$145,300, then sell at (+)$145,500, so $145,500- $145,300= $200]
In the other hand if i use the second ‘method’ in the first picture the profit wouldn’t be $700, but $560 [(.0001/1.2500) x 10,000= $.8 per pip x 700 pips = $560]

why the difference in such calculations? Are they both right? when i use one or another? or i’m just simple don’t getting it right, could you explain me? please?
(Am i even clear what my question is? hehe)

2

Both of those calculations are correct. But, they look so different, it’s not surprising that you’re confused.

There are two things causing your confusion:

(1) the two calculations are presented in different formats, and

(2) in the first calculation, you are making a purchase and paying for it with dollars;
and, in the second calculation, you are making a purchase and paying for it with francs
(which, then, have to be exchanged for dollars).

(There’s a third issue here, which I will leave until the end of this post.)

Let’s re-write the second calculation, using the same format as the first calculation:

722×275

Notice that, in the second calculation, you did not earn $200 — you earned 200 francs.

So, how much is that in dollars? At the prevailing exchange rate of USD/CHF = 1.4550, one dollar = 1.4550 francs.

Therefore, 200 francs = 200 / 1.4550 = $137.46

In the second calculation in the School lesson, the pip-value ($6.87 per pip) was introduced in order to convert 200 francs to U.S. dollars.

The slight difference between $137.40 (in the School lesson) and $137.46 (which I calculated above) is due to rounding the pip-value down to 2 decimal places.

I hope that clears up the math for you.

About that third issue that I mentioned: In the spot forex market, currencies are not actually “bought” or “sold”.

If you were to visit the Foreign Exchange Department of a large bank, and actually exchange $11,800 for €10,000 (as in the first calculation in the School lesson) you would actually be “buying” euro, and paying for them with dollars.

Likewise, in my re-write of the second calculation (from the School lesson), a similar cash transaction was described — “buying” U.S. dollars, and paying for them with Swiss francs.

But, in the second calculation, as presented in the School lesson, a spot forex transaction was described. And, in such a transaction, there is no actual buying or selling of currencies or currency pairs. However, the terms “buying” and “selling” are firmly embedded in this business, and you will continue to hear those terms used, just as they were used in this School lesson.

For now, don’t worry about the fact that those terms are totally incorrect. Instead, concentrate on thoroughly understanding the math involved in figuring profits and losses.

3

The difference is the relationship between the currencies in each pair. A currency pair in which the USD is the quote currency is called a “direct rate”. For example, if EUR/USD = 1.4500, then you know $1.45 = 1 Euro. This applies to the AUD/USD,EUR/USD,GBP/USD, and the NZD/USD. For these pairs the profit calculation is as you see in method #1. However the USD/CHF example, or any pair in which the USD is the base currency, gives an “indirect rate”. Example, USD/JPY = 75.00 means $1.00 = 75 yen. For these pairs you need the additional arithmetic you see in method #2, step #6, in order to calculate your profit/loss on a trade.

4

thanks a lot!! you were really helpful! =) Now it is clear!