Profit and loss in forex trading is determined by the price difference between your entry and exit points, multiplied by your position size. For a buy (long) trade, you profit when the price goes up and lose when it goes down. For a sell (short) trade, the opposite applies: you profit when the price falls and lose when it rises.

The formula is: Profit/Loss = (Close Price - Open Price) x Lot Size x Contract Size / Pip Size x Pip Value, or more simply: Profit/Loss = Pips Gained or Lost x Pip Value x Lots. For most pairs, a pip is 0.0001; for JPY pairs, a pip is 0.01. Pip values vary by currency pair and are affected by exchange rates.

For example, buying 1 standard lot of EUR/USD at 1.0850 and closing at 1.0900 yields 50 pips of profit. At $10 per pip for a standard lot, that is a $500 gain. Conversely, if the price dropped to 1.0800, you would lose 50 pips, or $500. Always calculate potential profit and loss before entering a trade to ensure the risk-reward ratio is favorable.