Do you understand Forex mechanics?

Hi,

I am a Forex newbie with a good deal of futures experience.

My question is - how to convert the profit or loss of a Cross currency (non-USD cross pair such as EUR/JPY) into USD?

The book I purchased "Getting Started in Currencies" has applicable formulas.

"Price Change = Exit Price - entry price"

"Conversion rate is the currency pair with the USD and the quote currency of the cross rate pair"

Case 1. "If the base currency of the conversion rate = USD then

Profit in USD= Price change x Units traded / Conversion rate"

Case 2. "If the quote currency of the conversion rate = USD then

Profit in USD = Price change x Units traded x Conversion rate"

In both Cases the author has one using the "current price" of the conversion rate pair.

The problem is he does not define the "current price". Is it the bid or the ask?

Here is an example of Case 1 where the base currency of the conversion rate pair is USD.

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

Hi Robert,

Welcome to Forex Factory! I think a couple general answers might shorten you list of questions so let's start there.

Don't get hung up on "current" price. Most charts show the bid (a few let you chose) so when you discuss a price it's commonplace to read right off of your chart. In forex (I am using USD terms) a pip for a pair like the EURUSD is 1/100 of a single cent or 0.0001. If you had a $100,000 position a 3 pip spread would be $30. Hardly worth getting your panties knotted up if you can afford $100,000 positions.

If it is your broker and you need the exact entry remember, just like futures, you sell at the bid and buy at the offer. The easiest way to remember this is to know that given 2 prices (seperated by spread) you always get the worse of the two.

For conversions there are a few simple ideas that will help you.

1. The first part of the pair is the base and the second is the quote (or counter). The position will be expressed in terms of the quote which seems logical considering we call it the quote. So, for the EURJPY, it is "quoted" in terms of Yen.
2. Think of it this way: "1 of mine is equal to how many of yours." When you look at the EURJPY you are saying "One of my Euros is worth how many Yen. As I write this the answer sepcicically would be "one Euro is worth 159.66 Yen.
3. Think of the quotes as fractions when doing conversions. The EURJPY is EUR/JPY. This not only helps during conversions but in understanding the response of a pair when either the numerator or denominator changes. If you have "EUR divided by JPY and you want USD then you must divide by the fraction USD/JPY (or multiply by JPY/USD) to get the JPY's to cancel out. It's that simple.

Using the above and your example: If you have 40,000 JPY (think of this as 40000JPY/1) and you want USD you simply multiply by 1 USD/ 115.15 JPY (current quote) and the JPY cancels out leaving you with USD. Using a 3 pip spread on the above example, the differnce in USD, between bid and ask is 96 cents. Hardly worth worrying about in a casual conversation.

I told you one of the main guys would answer.

Hi,

Thank you for the response.

As a follow up - In your response you said "If you have 40,000 JPY (think of this as 40000JPY/1) and you want USD you simply multiply by 1 USD/ 115.15 JPY (current quote)..."

1) The 115.15 (current quote) was that the bid or ask price at the time?

I am guessing bid. When discussing forex and the term "current quote" or "current price" is used does this typically refer to the bid price?

2) In my example a EURJPY trade had a 40,000JPY profit. What if instead a EURJPY trade had a 40,000 JPY loss - am I correct that I would still multiply by 1 USD/115.15 JPY (assuming its the current quote)?

(fwiw, I need to be exact because I am adding to a prop. program which I use in the futures markets. I want to try Forex and the program will calculate profit and loss)

Thanks for your assistance,

Robert

Hi Robert, the conversion process is the same. I can not say with certainty how your broker calculates the exact rate used. For all I know they could use one single price at the end of the day, I just have no way of knowing. It's a question that only your broker could answer.

Best regards,
Phil