How to calculate Profit and Loss (P&L) in CFD trading

How to calculate Profit and Loss (P&L) in CFD trading

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When you’re a beginner in Contract for Difference (CFD) trading, the maths involved in calculating profit and loss can seem confusing. In this FP Markets guide, you’ll learn how to look at your profit or loss numbers and work out your margin in every trade. We’ll also look at commissions, spreads and holding costs, and explain how they can affect the overall outcome of a trade.

CFD profit and loss (P&L) calculation

At its core, calculating your profit or loss boils down to one basic principle - the difference between your opening and closing prices, multiplied by your position size.

For a long position: profit or loss = (closing price - opening price) x position size. However, for a short position, it’s profit or loss = (opening price - closing price) x position size. The result is expressed in the relevant currency, and contingent upon the instrument used and how its contract is structured.

For example, suppose you open a CFD position on a share at $50 and later close it at $55. And if your position represents a hundred shares, then:

($55 - $50) x 100 = $500 profit

But if the price instead falls to $47:

($47 − $50) × 100 = −$300

This means the trade produced a $300 loss before applicable trading costs.

The concept of gross and net profit in CFD trading

Gross profit is the gain generated by a favourable price movement and your position size, before applicable trading costs. However, a trade that looks profitable on the chart can produce a smaller net gain once costs such as the spread, commission and applicable holding costs are taken into account. The net figure shows the trade’s result after these costs.

The way profit and loss is displayed can vary between brokers, platforms and instruments. Depending on the platform, P&L may be shown in your account currency, points, pips or another format.

In most major and minor forex pairs, a pip represents the fourth decimal place of the quoted price, while Japanese yen (JPY) pairs typically use the second decimal place. Some platforms also quote fractional pips, sometimes referred to as pipettes or points.

For indices and other instruments, the value of a point depends on the instrument’s contract specifications. Understanding how much your position gains or loses for each point of price movement can help you estimate potential P&L before placing a trade. To assess your potential risk, you should also consider your position size and stop-loss distance.

Factors affecting your net profit and loss (P&L)

There are several factors to consider when assessing what can affect the net result of a CFD trade:

Position size and contract specifications

The size of your position is directly proportional to your potential gains or losses. If you have a bigger position, both your gains and losses will be bigger too. On the other hand, your contract size determines the value of each price move. A mistake can mean that your exposure will be different from what you planned.

Spread and commissions

The spread is the difference between the buy and sell prices and is reflected in the cost of entering and exiting a position. As a result, a newly opened position may initially show a negative P&L because of the spread. Some brokers and account types also charge a separate commission, which may apply when opening, closing or both opening and closing a position. These costs reduce the net result of a trade, whether the trade ultimately produces a profit or a loss.

Overnight financing charges

A CFD that is held after the daily close may incur financing costs depending on the full value of your leveraged position, not merely your margin deposit. The charges can grow over time and can materially affect the net result if you decide to hold positions for days or weeks. If you go this route, always consider the total financing costs.

Slippage and gaps

Because markets move quickly, your order can go through at a different price you initially planned. This is called slippage. In the same way, markets can gap between sessions, a scenario where the order moves from a level to another without trading in between. Both slippage and gaps can have an impact on the entry and exit prices, which can also affect your eventual profit or loss. You can reduce this risk by implementing limit orders and planning for high-impact events, but such risk is hard to completely eliminate.

Currency conversion

If your account currency differs from the currency in which your trading profit or loss is calculated, the conversion will affect the final amount.

Questions to ask before buying/selling in trading

All this calculation isn’t about magically predicting whether a market will rise or fall: it’s about understanding the financial consequences of every trading session. So before entering a position, consider answering the following questions:

• What’s my entry price? (Know the level at which you enter the market.)
• What’s my position size? (This decision determines how much each price movement is worth)
• Where would I exit if the trade goes against my plan? (Set a risk level that could manage potential losses)
• What is my target profit? (Ensure the potential return justifies the risk you’re taking)
• What’s the cost associated with this trade? (Consider fees for spreads, commissions, overnight financing/holding costs, and applicable conversion costs)
• How does leverage impact my exposure? (Bear in mind that a comparatively small amount of margin can give exposure to a much larger position. Getting these numbers clear before trading can help reduce uncertainty around CFD trading.)

Ready to put the calculation into practice?

It can make the process less daunting when you learn that the calculations are relatively straightforward. Once you grasp the relevant concepts around profit and loss calculation like entry and exit price, price movement, leverage, as well as trading costs, you can have a working estimate of the potential profit or loss of a position before placing capital.

With FP Markets, traders can access a range of markets through CFD trading platforms developed to provide tools and information needed to analyse markets and manage positions.

Explore CFD trading with FP Markets and take the time to understand your potential profit, loss, and trading costs before placing your next trade. Open a live account today and start exploring global markets.