When you trade on the Forex market, your profit and losses are calculated as the difference between opening and closing prices.
Orders can be opened both to buy a currency pair (in this case, a trader benefits from the growth of the asset price) and sell it (eventually, in the future, a trader expects a lower price in comparison with the entry point). If the market moves in the opposite direction to traders' forecasts, they incur losses.
Let’s consider an example:
Please note that the example does not take into account spreads and (or) brokers’ commissions.
You purchased 1 lot of EURUSD at 1.2291, which means that you paid 122,910 USD to buy 100,000 EUR because 1 lot equals 100,000 units of the base currency.
Let’s assume that the asset price rose and you decided to close your position. At that moment, the price of EURUSD was 1.2391.
It turns out that you will have to give 100,000 EUR, which you had bought earlier, back to the market. However, they now cost 123,910 USD.
Your profit will be the difference of the asset market prices at the time of purchase and sale: 123,910 USD – 122,910 USD = 1,000 USD.
In case EURUSD started falling and you closed your position at 1.2191, you will incur losses, which are calculated in the same way:
1.2191 * 100,000 = 121,910 USD
121,910 USD – 122,910 USD = (-1,000 USD)
In this case, your losses are 1,000 USD.