Trade Forex Trading

1 400 Leverage Forex - Leverage & Margin

How Leverage Increases Profits & Loses?

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

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

Let's compute Forex profits and losses using two examples of leverage, based on an account balance of $1,000:

Just a heads-up: We're talking about the leverage you actually use, not the maximum leverage your broker offers. If your broker allows 400:1, but you only trade one lot, you're using 100:1 leverage. Trade four lots, and you're at the max - 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 contract/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

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 trading account balance

Example 2: (100:1 Leverage)

For 1 lot one pip equals $10 dollars

If you earn 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

Total = account balance - loss

Total= 1000 - 200

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

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

Use low leverage to cut risks. Higher ratios mean more danger. Stick to no more than 5:1 as a rule.

In money management leverage rules & 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 only trade 2 lots for every $100,000 in their account.

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