1 400 Leverage Forex - Leverage & Margin

How Leverage Increases Profits & Loses?

If you have a 1,000 dollar account with leverage 100:1 you as a trader can buy a maximum of 1 lot which is equal to $100,000 dollars contract(1 Standard lot).

If you have a $1,000 account with leverage 400:1 you as a trader can buy a maximum of 4 lots which is equal to $400,000 contract(4 Standard lots).

Let us calculate Forex profits and losses based in 2 examples of used leverage, based on $1,000 dollars account:

NB: This is the Leverage used not the Maximum leverage, If a broker gives you 400:1 leverage, but you only trade 1 lot the used leverage you are using is 100:1, But if you trade 4 contracts then the leverage you'll use is 400:1 which is equal to Maximum leverage(400:1).

So the illustration referred in this tutorial guide below is talking of the leverage used based on the volume of the trade transaction that you've opened.

Example 1: ( 400:1 Leverage )

For 1 lot 1 pip equals $10

If you earn a profit of 100 pips, the calculation of the profit in terms of dollars is:

4 lots

1 pip = $40

100 pips = 100 * 40 = $4,000 dollars

Total= balance + profit

= 1000+ 4000

= $5,000 you've just doubled your account balance five times

If you accrue a loss of 20 pips the loss in dollars is

4 lots

1 pip = $40 dollars

20 pips = 20 * 40 = $800

Total= account balance - loss

Total= 1000 - 800

Total = $ 200 you've just lost 80% of your account balance

Example 2: (100:1 Leverage)

For 1 lot one pip equals $10 dollars

If you make a profit of 100 pips, the calculation of the profit in terms of dollars is:

1 lot

1 pip = $10 dollars

100 pips = 100 * 10 = $1000

Total= balance + profit

= 1000+ 1000

= $2,000 you've just doubled your trading account balance

If you make a loss of 20 pips the loss amount in dollars is

1 lot

1 pip = $10

20 pips = 20 * 10 = $200 dollars

Total= account balance - loss

Total= 1000 - 200

Total = $ 800 you've just lost 20% of your account balance

From the above example you as a trader can see that the more leverage you use the greater the profits or losses & less you use the lesser the profit or loss.

It's therefore better to use less leverage so as to cap the risks involved. The greater the leverage ratio used the higher the risks. This is one of leverage guidelines not to use more than 5:1 leverage ratio option.

In money management leverage guidelines: It's always recommended to stay below 10:1 ratio which's also still high, most professional money managers use 2:1 meaning they trade only 2 lots for every $100,000 in their account.

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1 400 Leverage Forex - Leverage & Margin

How Leverage Increases Profits & Loses?

Example 1: ( 400:1 Leverage )

Example 2: (100:1 Leverage)