Understanding the profit and loss formula is essential for anyone involved in trading, investing, or basic financial decision-making. On a trading platform like MT5, profit and loss calculations happen automatically, but traders still need to understand how these numbers are derived in order to manage risk, evaluate performance, and make informed trading decisions.
This guide explains the profit and loss formula from first principles, covers all related formulas and conditions, and then connects them directly to real trading scenarios on MT5 using clear numerical examples.
The profit and loss formula explains how to calculate financial gain or loss by comparing the selling price with the cost price. Profit occurs when the selling price is higher than the cost price, while loss occurs when the selling price is lower. Percentage formulas express profit or loss relative to the cost price and are widely used in trading analysis.
Key points
- Profit and loss are calculated using cost price and selling price
- Percentage calculations are always based on cost price
- MT5 displays profit and loss automatically, but the logic remains the same
- Understanding the formula helps with risk management and position sizing
- The same principles apply to forex, indices, commodities, and crypto trading
Key Terms Used in Profit and Loss
Before using any formula, it is important to understand the core terms. These definitions are standard and apply both in mathematics and trading.
Cost Price (CP)
The cost price is the original price at which an asset is bought. In trading, this corresponds to the entry price of a position, adjusted for position size.
Selling Price (SP)
The selling price is the price at which an asset is sold. In trading, this is the exit price when a position is closed.
Profit
Profit is the financial gain made when the selling price is higher than the cost price.
Loss
Loss is the financial shortfall when the selling price is lower than the cost price.
Profit Percentage
Profit percentage expresses profit as a proportion of the cost price.
Loss Percentage
Loss percentage expresses loss as a proportion of the cost price.
Profit and Loss Formula
This section presents the formulas exactly as they are used in mathematics and trading logic.
Profit Formula
Profit = Selling Price − Cost Price
Loss Formula
Loss = Cost Price − Selling Price
Profit Percentage Formula
Profit % = (Profit ÷ Cost Price) × 100
Loss Percentage Formula
Loss % = (Loss ÷ Cost Price) × 100
These formulas form the foundation of all profit and loss calculations, whether done manually or automatically by a trading platform such as MT5.
When Does Profit or Loss Occur?
Profit and loss depend entirely on the relationship between cost price and selling price.
Condition | Result |
Selling Price > Cost Price | Profit |
Selling Price < Cost Price | Loss |
Selling Price = Cost Price | No profit, no loss |
In MT5, this logic is applied continuously in real time as market prices move.
How to Calculate Profit and Loss
The calculation process follows a fixed sequence.
- Identify the cost price (entry price)
- Identify the selling price (exit price)
- Compare selling price with cost price
- Apply the correct formula (profit or loss)
- Calculate percentage if required
In trading, additional factors such as lot size, contract size, and point value are applied after this basic logic.
Profit and Loss Formula Examples (Basic)
Example 1: Profit Case
- Cost Price = 100
- Selling Price = 120
Profit = 120 − 100 = 20
Profit % = (20 ÷ 100) × 100 = 20%
Example 2: Loss Case
- Cost Price = 200
- Selling Price = 170
Loss = 200 − 170 = 30
Loss % = (30 ÷ 200) × 100 = 15%
These examples illustrate the mathematical logic that underpins trading profits and losses.
Applying the Profit and Loss Formula in Trading
In trading, cost price and selling price are represented by market prices. The formulas remain the same, but values are scaled based on position size and contract specifications.
Cost Price in Trading
In MT5, the cost price is the price at which a trade is opened.
Selling Price in Trading
The selling price is the price at which the trade is closed, either manually or automatically via stop loss or take profit.
Profit and Loss Display in MT5
MT5 calculates profit and loss in real time and displays:
- Floating profit or loss for open positions
- Final realized profit or loss after closing a trade
Despite automation, understanding the formula helps traders interpret results correctly.
Profit and Loss Calculation in Forex Trading on MT5
Forex trading provides a clear example of how profit and loss formulas operate in practice.
Example: EUR/USD Buy Trade
- Entry price (CP) = 1.1000
- Exit price (SP) = 1.1050
- Position size = 1 standard lot (100,000 units)
- Price movement = 50 pips
- Profit calculation:
Profit = Price difference × position size
Profit = 0.0050 × 100,000 = 500 (in base currency terms)
The underlying logic is still:
Profit = Selling Price − Cost Price
MT5 applies this automatically based on contract specifications.
Profit and Loss in Sell (Short) Trades
In sell trades, profit occurs when the selling price is lower than the entry price.
Example: GBP/USD Sell Trade
- Entry price (CP) = 1.3000
- Exit price (SP) = 1.2900
Profit occurs because the position benefits from falling prices.
Profit = Entry Price − Exit Price
MT5 handles this inversion automatically, but the principle is consistent with the profit and loss formula.
Profit and Loss Percentage in Trading
Percentage calculations are important for evaluating performance and risk.
Profit Percentage in Trading
Profit % = (Net Profit ÷ Capital at Risk) × 100
Example:
- Capital risked = 1,000
- Profit earned = 50
Profit % = (50 ÷ 1,000) × 100 = 5%
This method aligns with the standard profit percentage formula, using invested capital as the cost base.
Loss Percentage and Risk Control
Loss percentage is critical for risk management.
Example: Controlled Loss
- Capital risked = 1,000
- Loss incurred = 20
Loss % = (20 ÷ 1,000) × 100 = 2%
Many traders using MT5 aim to keep losses below a fixed percentage per trade, commonly 1–2%.
Role of Stop Loss and Take Profit in MT5
Stop loss and take profit levels are practical applications of the profit and loss formula.
Stop Loss
Defines the maximum acceptable loss.
Loss = Cost Price − Stop Loss Price
Take Profit
Defines the target profit level.
Profit = Take Profit Price − Cost Price
MT5 calculates these values before the trade is executed, allowing traders to assess risk–reward ratios.
Risk–Reward Ratio and Profit and Loss
The risk–reward ratio compares potential loss to potential profit.
Risk–Reward Ratio = Potential Loss ÷ Potential Profit
Example:
- Risk = 20
- Reward = 60
Risk–Reward Ratio = 1:3
This concept depends entirely on profit and loss calculations.
Profit and Loss Across Different Asset Classes on MT5
The same formulas apply across all instruments.
Forex
Profit and loss are based on pip movement and lot size.
Indices
Profit and loss depend on point movement and contract value.
Commodities
Price differences multiplied by contract size determine results.
Cryptocurrencies
Profit and loss reflect price movement multiplied by trade volume.
In all cases:
Profit = Exit Value − Entry Value
Loss = Entry Value − Exit Value
Break-Even Point in Trading
The break-even point occurs when there is no profit and no loss.
Selling Price = Cost Price
In MT5, spreads and commissions mean the price must move slightly in favor of the trade to reach true break-even.
Accounting for Trading Costs
Trading costs affect final profit and loss.
Spread
The difference between bid and ask prices.
Commission
A fixed or percentage-based fee per trade.
Swap
Overnight financing cost.
Net Profit or Loss = Gross Profit or Loss − Trading Costs
Understanding this helps traders avoid overestimating performance.
Common Mistakes in Profit and Loss Calculations
- Using selling price as the base for percentage calculations
- Ignoring trading costs when evaluating profit
- Confusing profit logic in buy vs sell trades
- Overlooking position size impact
- Focusing on monetary profit instead of percentage return
Practical Trading Scenarios on MT5
Scenario 1: Small Consistent Profits
A trader targets 1% profit per trade with controlled losses.
Scenario 2: High Risk Without Percentage Awareness
A trader focuses only on price movement, ignoring capital exposure.
Understanding the profit and loss formula helps identify which approach is sustainable.
Why Understanding Profit and Loss Matters for Traders
Even though MT5 automates calculations, traders who understand the formula can:
- Set realistic targets
- Control risk exposure
- Compare strategies objectively
- Evaluate long-term performance
- Avoid emotional decision-making
FAQs
What is the profit and loss formula?
The profit and loss formula calculates financial gain or loss by comparing selling price with cost price. Profit equals selling price minus cost price, while loss equals cost price minus selling price.
Is profit percentage always calculated on cost price?
Yes, profit percentage and loss percentage are always calculated using cost price as the base. This ensures consistency and accurate comparison.
How does MT5 calculate profit automatically?
MT5 uses entry price, exit price, position size, and contract specifications to apply the profit and loss formula in real time.
Can profit be negative in trading?
No, profit itself cannot be negative. A negative result is classified as a loss.
Why do traders focus on percentage profit instead of amount?
Percentage profit allows performance comparison across different account sizes and trading strategies.
Does spread affect profit and loss?
Yes, spread increases the effective cost price, meaning the market must move in your favor before profit appears.
Are profit and loss formulas the same for all markets?
Yes, the core formulas remain the same. Only contract size and price units change across markets.
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