One of the more basic, but very important skills to learn in trading is that of calculating trading profits and losses.

Below is a simple formula for the calculation of trading profit/loss:

Method 1 – (exit price – entry price) x quantity x direction = profit/loss – in this example “direction” is either a +1 for a trade where we are buying or a -1 for a trade where we are selling short.

Method 2 – final value – initial value = profit/loss

Let’s put some numbers with those examples. Let’s say that we bought 1000 shares of XYZ stock at $20 per share and we sold 1000 shares of XYZ stock at $25 per share.

Using Method 1:

($25 per share – $20 per share) x 1000 shares x 1 = $5 x 1000 = $5000 profit

Using Method 2:

Final value equals $25 per share x 1000 shares = $25,000
Initial value equals $20 per share x 1000 shares = $20,000

$25,000 $-20,000 = $5000 profit

Let’s take a look at how things would look if we had sold our shares at a loss. Let’s say we bought 1000 shares of XYZ stock at $25 per share and then sold 1000 shares of XYZ stock at $20 per share.

($20 per share – $25 per share) x 1000 shares x 1 = -$5 x 1000 = -$5000 loss

Now let’s look at an example of selling a stock short. When you’re selling a stock short you are anticipating a decrease in stock price. Let’s say we sold short 1000 shares of XYZ at $25 per share and then bought those 1000 shares back for $20 per share.

($20 per share – $25 per share) x 1000 shares x -1 = $5 x 1000 = $5000 profit

Here’s another example of selling a stock short. In this example we sold 1000 shares of XYZ at $20 per share and bought those 1000 shares back for $25 per share.

($25 per share – $20 per share) x 1000 shares x -1 = -$5 x 1000 = -$5000 loss

These are just a few examples using stocks. If you are trading another financial instrument such as Forex, futures, etc. Method 1 would look like this:

Method 1 – (exit price – entry price) x quantity x direction x factor = profit/loss

In this example “direction” is either a +1 for a trade where we are buying or a -1 for a trade where we are selling short. The “factor” has to do with price scaling which varies for different financial instrument. Here’s an example using the EURUSD Forex currency pair based on trading one standard contract. In this example we are buying the EURUSD in anticipation of an increase in price.

Entry price = 1.32664
Exit price = 1.33432
Quantity = 1 contract
Direction = 1
Factor = 100,000

1.33432 -1.32664 x 1 contract x 1 x 100,000 = $768 profit

We have just covered a few examples of some simple calculations for determining the profit or loss on a trade. It is important to understand how to do this manually as this will allow you to compare the results of your calculations with the results you see in your trading platform and on your brokerage statements as well.