How to Calculate Profit/Loss for non-USD Cross Rate

[aforextrader]

Hi,

I am just getting started with Forex and learning to calculate profit and loss of a trade. After reading the book "Getting started in currencies" I can successfully calculate the profit or loss of a trade - unless dealing with a non-USD cross rate such as EUR/JPY. In this case I can calculate the profit or loss in the quote currency but don't know how to convert into USD.

How do I convert the p/l of a non-USD cross rate into USD?

step 1 = calculate profit or loss in quote currency using (exit price - entry price ) x Units Traded
step 2 = find the currency pair with USD and the quote currency of the cross rate pair.
step 3 = convert quote currency profit or loss to USD

a. If the quote currency of the pair found in step 2 is the USD then multiple the profit or loss by the "current price" of that pair
b. If the base currency of the pair found in step 2 is the USD then divide the profit of loss by the "current price" of that pair

The problem is the book "Getting started in currencies" does not define the term "current price".

In step 3 by what am I dividing or multiplying the profit or loss - the bid or the ask (of the pair found in step 2)?

Here is an example

Ex. Buy 100,000 EUR/JPY at 157.13 then later sell 100,000 EUR/JPY at 157.53
i. 157.53-157.13= .4x100000 = 40,000 JPY profit.
ii. To convert to US dollars find Conversion pair = currency pair with both JPY and USD = USD/JPY
iii. For our example assume the quote of USD/JPY is currently 105.30 - 105.32

Question 1: To convert the 40,000 JPY profit into USD do I divide it by the USD/JPY bid (105.30) or ask (105.32)?
Question 2: If I sold EUR/JPY first and then bought to close the trade resulting in a 40,000 JPY profit would I divide it by the USD/JPY bid or ask?
Question 3: If I have a loss instead of a profit from a EUR/JPY trade, does that change what I divide the loss by (bid or ask)?

Lastly, please inform me whether or not your answers are changed if USD is the quote currency - and therefore would multiple the profit or loss by the "current price" of the applicable USD pairing.

Thanks in advance for your assistance,

Robert

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[DrForex]

Originally Posted by aforextrader

Hi,

I am just getting started with Forex and learning to calculate profit and loss of a trade. After reading the book "Getting started in currencies" I can successfully calculate the profit or loss of a trade - unless dealing with a non-USD cross rate such as EUR/JPY. In this case I can calculate the profit or loss in the quote currency but don't know how to convert into USD.

How do I convert the p/l of a non-USD cross rate into USD?

step 1 = calculate profit or loss in quote currency using (exit price - entry price ) x Units Traded
step 2 = find the currency pair with USD and the quote currency of the cross rate pair.
step 3 = convert quote currency profit or loss to USD

a. If the quote currency of the pair found in step 2 is the USD then multiple the profit or loss by the "current price" of that pair
b. If the base currency of the pair found in step 2 is the USD then divide the profit of loss by the "current price" of that pair

The problem is the book "Getting started in currencies" does not define the term "current price".

In step 3 by what am I dividing or multiplying the profit or loss - the bid or the ask (of the pair found in step 2)?

Here is an example

Ex. Buy 100,000 EUR/JPY at 157.13 then later sell 100,000 EUR/JPY at 157.53
i. 157.53-157.13= .4x100000 = 40,000 JPY profit.
ii. To convert to US dollars find Conversion pair = currency pair with both JPY and USD = USD/JPY
iii. For our example assume the quote of USD/JPY is currently 105.30 - 105.32

Question 1: To convert the 40,000 JPY profit into USD do I divide it by the USD/JPY bid (105.30) or ask (105.32)?

The Ask.

Originally Posted by aforextrader

Question 2: If I sold EUR/JPY first and then bought to close the trade resulting in a 40,000 JPY profit would I divide it by the USD/JPY bid or ask?

Still the Ask.

What you try to do is figure out the value of 40,000 JPY in US dollars. Doesn't matetr how you got the 40,000 JPY. point is you have it and you want the USD value, so you want to sell 40,000 JPY, buy USD, therefore you use the buy (ASK) price to determine.

Originally Posted by aforextrader

Question 3: If I have a loss instead of a profit from a EUR/JPY trade, does that change what I divide the loss by (bid or ask)?

No. You still want the US dollar value of the loss. Same calculation.

Originally Posted by aforextrader

Lastly, please inform me whether or not your answers are changed if USD is the quote currency - and therefore would multiple the profit or loss by the "current price" of the applicable USD pairing.

Can't think what you ask here. give example and apply the above principles. i am sure you will figure it out.

May I just advise that you really don't have to go through all this trouble. Simply look it up in your trading account. Say your trading account is in USD and you did the above EURJPY trade. Everything will automatically be converted to USD. You can concentrate on trading properly ...

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[aforextrader]

DrForex,

Thank you for your reply.

I understand a broker handles these calculations. My need for understanding the mechanics comes from the program I use for trading. I would like to test my system in the Forex markets so I need to understand the calculation behind profit and loss in order to do the programming.

I should have mentioned the situation in my first post.

The situation I had in mind where I said "if USD is the quote currency" would be something like a EUR/GBP trade. In this instance, to convert the profit or loss into USD I need to look at the GBP/USD pair.

Unlike my earlier example USD is now the Quote currency. The forex book I have suggests that to convert the GBP profit or loss into USD I need to perform a multiplication. Should I still use the ASK (of GBP/USD in this example)?

Here is an actual example -

Ex. Buy 100,000 EUR/GBP at 0.6772 then later Sell 100,000 EUR/GBP at 0.6754

i. 0.6754- 0.6772 = -0.0018 x 100000 = -180 GBP loss
ii. To convert to US dollars find Conversion pair = currency pair with both GBP and USD = GBP/USD
iii. For our example assume the BID of GBP/USD is currently 1.8899 and the ASK of GBP/USD is currently 1.8902

Since USD is the quote currency do I multiple the loss by 1.8902 - the ASK?

so -180 x 1.8902 = -$340.24

Is that correct?

Thanks again for your assistance.

Robert

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[DrForex]

Originally Posted by aforextrader

DrForex,

Thank you for your reply.

I understand a broker handles these calculations. My need for understanding the mechanics comes from the program I use for trading. I would like to test my system in the Forex markets so I need to understand the calculation behind profit and loss in order to do the programming.

I should have mentioned the situation in my first post.

The situation I had in mind where I said "if USD is the quote currency" would be something like a EUR/GBP trade. In this instance, to convert the profit or loss into USD I need to look at the GBP/USD pair.

Unlike my earlier example USD is now the Quote currency. The forex book I have suggests that to convert the GBP profit or loss into USD I need to perform a multiplication. Should I still use the ASK (of GBP/USD in this example)?

Here is an actual example -

Ex. Buy 100,000 EUR/GBP at 0.6772 then later Sell 100,000 EUR/GBP at 0.6754

i. 0.6754- 0.6772 = -0.0018 x 100000 = -180 GBP loss
ii. To convert to US dollars find Conversion pair = currency pair with both GBP and USD = GBP/USD
iii. For our example assume the BID of GBP/USD is currently 1.8899 and the ASK of GBP/USD is currently 1.8902

Since USD is the quote currency do I multiple the loss by 1.8902 - the ASK?

so -180 x 1.8902 = -$340.24

Is that correct?

Thanks again for your assistance.

Robert

You have GBP and you want USD. So you need to sell GBP, BUY USD. It will be on the BID.

You always get the worst deal because the markup for the counter party is in the spread.

So the 40,000 / by the larger side of the spread.

The 180 GBP * by the smaller smaller of the spread.

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[aforextrader]

DrForex,

Thanks for the reply.

In regards to converting non-USD profits or loss into USD that "
You always get the worst deal because the markup for the counter party is in the spread."

My question is that in my example I had a loss (not profit) of -180 GBP with a GBP/USD BID-ASK of 1.8899/1.8902

If I multiple -180 GBP x 1.8899 (BID) = -340.18
If I multiple -180 GBP x 1.8902 (ASK) = -340.236

Your suggestion was to multiple the -180 by the BID. This would get the trader the smaller loss. Does this not violate the principle of always getting the worse deal?

In your post you actually said "The 180 GBP * by the smaller smaller of the spread." Please note you referred to the 180 GBP as a profit, not a loss. Perhaps your statement referred to a winning/profitable trade?

Is the correct math (where USD is the quote currency) to multiple by the BID if a profit and multiple by the ASK for a loss? Or is correct to multiple by the BID irregardless of profit or loss?

Thanks for the clarification

Robert

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[DrForex]

the point is (I think) that you want to convert a GBP value to a USD value and for some reasons known to yourself you want to do it on a spread.

the question is what is the amount of dollars that will equal 180 gbp?

I am even now getting more confused than you because coming to think of it in your eurgbp example you deal in eur. Euro is the base currency so then it is 0.xxxx GBP per 1 euro. You make or lose 18 "euro pips".

However that may be, whatever you have you want to express in a USD value and there is a buy price and a sell price and you sell the stuff that you have and you sell it at the lower of the two prices in the spread if the USD is the quote currency.

so if it was GBP at say 2.0410/08 you would sell at 08 and would receive say 100* 2.0408 = $204.08 which is less than $204.10, i.e. the worse deal.

of it was eur you wanted to convert the same:

You have EUR 100 and you can trade at 1.4150/53. You sell euro, buy USd thus you trade at 1.4150 * 100 = $141.50 and not $141.53.

It is not relevant if you have a positive or negative number in GBP or EUR. You just add the minus at the end to the dollar amount. You owe 180 GBP, so you owe 180 * USD rate $.