For ease of use, our online trading platforms automatically calculate the P&L of a traders' open positions. However, it is useful to understand how this calculation is derived.
To illustrate a typical FX trade, consider the following example.
The current bid/ask price for USD/CHF is 1.2622/1.2627, meaning you can buy $1 US for 1.2627 Swiss Francs or sell $1 US for 1.2622.
Suppose you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF). To execute this strategy, you would buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.
So you make the trade: purchasing US$100,000 and selling 126,270 Francs. (Remember, at 1% margin, your initial margin deposit would be $1,000.)
Unexpectantly, the USDCHF rate drops to 1.2602/07. You decide now to take this trade as a realized loss, close this order, and sell $1 US for 1.2602 francs.
Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs.
You sell US$100,000 at the current USDCHF rate of 1.2602, and receive 126,020 CHF. Since you originally sold (paid) 126,270, your net loss is 250 CHF.
To calculate your realized loss in terms of US dollars, simply divide 250 by the current USD/CHF rate of 1.2602
Total loss = $198.38 (or 25 pip loss on this transaction)
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