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Lesson

Calculating Average Price in Delta Trading

It is important that each client knows and understands how their trading affects the result (profit/loss) from a position and the account equity. There are three main methods for calculating the average price price and the profit/loss (result) from an open position. Each brokerage chooses one of those three methods, but the bottom line is that the final result turns out to be the same.

An example of a EUR/USD trade and account equity of 10,000 USD.

Method 1: Each increase in the size or partial closure of the position affects its average price. The result from the client’s trading activity is reflected in their account transactions when the position is fully closed.

Deltastock has chosen to use this method.

Trade Amount (lots) Market Price Net Position (lots) Average Price Unrealised Profit/Loss* Realised Profit/Loss** Account Equity***
Trade 1 Buy 10 1.1400 10 1.1400 0 $10,000
Trade 2 Buy 10 1.1300 20 1.1350 -100 0 $9,900
Trade 3 Sell -10 1.1450 10 1.1250 200 0 $10,200
Trade 4 Sell -10 1.1350 0 n/a 100 $10,100
$10,100

*Unrealised Profit/Loss is the result from all your open positions. This is the profit/loss that would be made if you were to close all your positions.

**Realised Profit/Loss is the result from all the positions you have closed. The realised profit loss is deposited into your trading account.

***Account Equity is the amount currently held in your trading account, calculated as if all your open positions were closed at the current market prices.

How to calculate the average price of the above position:

(10 x 1.1400) + (10 x 1.1300) – (10 x 1.1450) = 1.1250 (average price)
10 (net number of lots: 10 + 10 – 10)

Trade 1 opens a 10-lot long position.

Trade 2 increases the size of the position twice – which changes its average price.

Trade 3 partially closes the position. The profit/loss remains unrealised and is not reflected in the account transactions but in the current account equity and average price of the position, which changes from 1.1350 to 1.1250.

Trade 4 fully closes the position and the current profit/loss of 100 USD is realised, which is reflected in both the current account equity and the account transactions.

Final result (profit/loss) from client’s trading activity = 100 USD

Final account equity = 10,100 USD

Method 2: When the position size is increased, the average price changes. When the position is partially closed, the average price remains unchanged, and the realised partial profit/loss is reflected in the account transactions.

Trade Amount (lots) Market Price Net Position (lots) Average Price Unrealised Profit/Loss Realised Profit/Loss Account Equity
Trade 1 Buy 10 1.1400 10 1.1400 0 $10,000
Trade 2 Buy 10 1.1300 20 1.1350 -100 0 $9,900
Trade 3 Sell -10 1.1450 10 1.1250 100 100 $10,200
Trade 4 Sell -10 1.1350 0 n/a 0 $10,100
$10,100

Trade 1 opens a 10-lot long position.

Trade 2 increases the size of the position twice – which changes its average price.

Trade 3 partially closes the position. The average price remains unchanged, and the profit/loss of 100 USD, which has been realised from selling 10,000 USD is reflected in the account transactions. The current profit/loss from the remaining position remains unrealised.

In Trade 4 the realised profit/loss is 0 USD, as the closing price is equal to the average price of the position.

Final result (profit/loss) from client’s trading activity = 100 USD

Final account equity = 10,100 USD

Method 3: When the position size is increased, the average price changes. When the position is partially closed, the average price becomes the price of the last trade, and the whole of the current profit/loss is realised and is reflected in the account transactions.

Trade Amount (lots) Market Price Net Position (lots) Average Price Unrealised Profit/Loss Realised Profit/Loss Account Equity
Trade 1 Buy 10 1.1400 10 1.1400 0 $10,000
Trade 2 Buy 10 1.1300 20 1.1350 -100 0 $9,900
Trade 3 Sell -10 1.1450 10 1.1250 0 200 $10,200
Trade 4 Sell -10 1.1350 0 n/a -100 $10,100
$10,100

Trade 1 opens a 10-lot long position.

Trade 2 increases the size of the position twice – which changes its average price.

Trade 3 partially closes the position. The average price of the position changes and becomes equal to the price of the trade (1.1450), and the whole of the current profit/loss (in the amount of 200 USD) becomes realised profit/loss and is reflected in the account transactions.

In Trade 4 closes the remaining position and realises a profit/loss of -100 USD (as the closing price is 1.1350 – i.e. one figure below the average price of the position), which is also reflected in the account transactions.

Final result (profit/loss) from client’s trading activity = 100 USD

Final account equity = 10,100 USD

In conclusion, we can say that no matter which one of the above methods the brokerage chooses to use, the final profit/loss from the executed trades will always be the same for the client; in our example it equals 100 USD.


Note: Views expressed here are for education purposes only and are not the views of Deltastock or its employees. These views are not personal recommendations or investment advice. Any quotes of financial instruments displayed on this page are indicative only and do not reflect the current market situation. You may wish to seek independent advice before entering into transactions.