How to Calculate Profit and Loss

Trading futures can be a lucrative venture, but it requires a clear understanding of how to calculate profit and loss. This article will explain the basics of calculating trading profit using the example of ES (E-mini S&P 500) futures, a popular futures contract.

Basics of ES Futures

ES futures are contracts that derive their value from the S&P 500 index. Here are some key points to understand:

  • Tick Size: The smallest price increment in ES futures is called a "tick." For ES futures, one tick equals $12.50.
  • Points: One point in ES futures equals four ticks. Therefore, one point equals $50 (4 ticks x $12.50).

Key Terms:

  • Tick: Smallest price movement, worth $12.50 in ES futures.
  • Point: Comprises 4 ticks, worth $50 in ES futures.

How to Calculate Trading Profit

To calculate trading profit, follow these steps:

  1. Determine Entry and Exit Prices: Identify the prices at which you enter (buy) and exit (sell) the trade.
  2. Calculate the Price Movement: Subtract the entry price from the exit price to find the total price movement.
  3. Convert the Price Movement to Ticks or Points: Depending on your preference, convert the price movement into ticks or points.
  4. Calculate Profit or Loss: Multiply the number of ticks or points by their respective dollar values to find your total profit or loss.

Example Calculation

Let's go through an example to illustrate this process.

Scenario: You enter a long position (buy) at 4150.50 and exit (sell) at 4152.25.

  1. Determine Entry and Exit Prices:
    • Entry Price: 4150.50
    • Exit Price: 4152.25
  2. Calculate the Price Movement:
    • Price Movement = Exit Price - Entry Price
    • Price Movement = 4152.25 - 4150.50
    • Price Movement = 1.75 points
  3. Convert the Price Movement to Ticks or Points:
    • Since 1 point equals 4 ticks, 1.75 points = 1.75 x 4 = 7 ticks.
  4. Calculate Profit:
    • Profit in Ticks = 7 ticks x $12.50 per tick = $87.50
    • Alternatively, using points: Profit in Points = 1.75 points x $50 per point = $87.50

So, in this example, your profit from the trade would be $87.50.

Understanding the Calculation in Context

Trading Scenarios:

  • Long Position (Buying): You profit when the exit price is higher than the entry price.
  • Short Position (Selling): You profit when the exit price is lower than the entry price.

Calculating Loss:

If the trade goes against you, the same calculation applies, but it results in a negative value, indicating a loss.

Example: If you entered a long position at 4150.50 and exited at 4149.50:

  • Price Movement = 4149.50 - 4150.50 = -1 point (or -4 ticks)
  • Loss in Ticks = -4 ticks x $12.50 per tick = -$50
  • Alternatively, using points: Loss in Points = -1 point x $50 per point = -$50

In this case, you would incur a loss of $50.

On image below, we demonstrate a trade setup with a 5-point Stop Loss (SL) and a 5-point Target, resulting in a Risk-Reward Ratio (RRR) of 1:1.

Negative RRR Example