Finance

Profit and Loss: What Is The Best Way to Calculate Them?

3 Mins read

Before you start trading in the commodity markets, you must decide about the products to trade-in. One of the factors that will preoccupy your mind as you make the decision is the returns you expect from each of the products. The same thing happens when you jump into trading and investing. Here, the decisions you make at every moment determine the profit and loss you’ll have.

Decision-making is therefore critical when trading and investing. It determines the assets to buy and those to sell at any given time. The aggregate profit you make is determined by the returns from each decision you make.

As such, traders must emphasize the decisions they make before trading. This means that you must sharpen your ability to process information and use it to make decisions. Read on to find out how to calculate trading profit and why making decisions is important.

Why Is Decision-Making Crucial In Trading And Investing?

Decision-making is therefore critical when you trade or invest. It requires you to gather valuable informational inputs and subject them to certain criteria for evaluation and comparison. If the trader is using charts to make trading decisions, they must compare charts in different timeframes and decide how the pattern formed will impact the asset price.

Of course, you are a human being, so your decision-making process is likely to be susceptible to pitfalls. Therefore, emotions fear and greed could be your main undoing when making decisions. Often, they will lead you to make costly mistakes. Thus, you end up with poor trading decisions which may impact trading. As such, you must avoid or eliminate fear, emotions, and greed when making decisions.

What Are Profit And Loss?

Profits refer to the gains made when you sell a product. It compares the revenue and cost of generating it. Thus, when you less the cost from the selling price, you end up with a profit.

Profit= selling price – cost price

On the other hand, if the selling price is less than the cost price, the trader incus a loss. So the difference between the selling price and the product cost constitutes a loss.

Loss =Cost Price- Selling price

What Is The Formula For Calculating Profit And Loss?

A formula for calculating profit or loss can help you to depict the extent of the gain made or the loss incurred in a trade. If the selling price = S.P. while the cost price = C.P. we can calculate the profit or loss as:

  • Profit = SP-CP
  • Loss = CP-SP
  • For Example, Peter bought a product for $50 and sold it for $80. We can calculate his profit as follows:
  • Profit =SP-CP (80-50) = $30
  • But supposing Peter sold the product at $40, then we can calculate his loss as:
  • Loss= CP-SP (50-40) =$10

Notice that the loss formula is derived from the selling price and the cost of the product. Thus, a product sold at a higher price than it was bought fetches a profit, while the one sold at a price lower than it was bought at results in a loss.

What Is A Trading Account?

A trading account holds cash or securities to use to buy assets. Also, traders use an online investment trading account to monitor trades and buy securities. A trading account helps an investor to buy and sell shares and foreign exchanges in the public market. 

Thus, a trading account may refer to the primary account that a trader uses to buy and sell securities on a daily basis. Before the emergency of trading accounts, traders needed to present themselves on the stock exchange market to buy securities. It was an open outcry system in which a trader had to be present to communicate with other traders verbally on the floor before buying and selling securities. The open outcry system was eventually replaced with a trading account when electronic trading emerged.

Why Is It Best To Open A Trading Account In Naga?

Opening a trading account in Naga is necessary if you want to trade flawlessly. As an online broker, Naga has simplified access to financial markets and made trading easier.

The broker features a demo account that helps beginners to understand how the market works before diving into live trades. It enables them to avoid unnecessary mistakes which may risk their trading capital.

Final Thoughts

Making a decision is an important aspect of trading. It helps to determine the trades to make and when to trade. Good decisions determine your profit, while bad decisions could result in losses.

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