Best Leverage - 1:100 Leverage Forex - Best leverage rules: It is Best to Stay below 10:1 Leverage
How Leverage Increases Profits & Loses?
If you have a 10,000 dollar Forex account with leverage 100:1 you as a trader can buy a maximum of 10 lots which is equal to 1,000,000 dollars or 10 contracts(10 Standard lot).
If you have a 10,000 dollar Forex account with leverage 400:1 you as a trader can buy a maximum of 40 lots which is equivalent to 4000,000 dollars or 40 contracts(40 Standard lots).
Let us calculate profits and losses based in 2 examples of used leverage, based on $10,000 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 10:1, But if you trade 40 contracts then the leverage you'll be using 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 or 40 Lots)
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:
40 lots
1 pip = $400 dollars
100 pips = 100 * 400 = $40,000
Total= balance + profit
= 10,000+ 40,000
= $40,000 you've just doubled your account balance five times
If you accrue a loss of 20 pips the loss amount in dollars is
40 lots
1 pip = $400 dollars
20 pips = 20 * 400 = $8,000
Total= account balance - loss
Total= 10,000 - 8,000
Total = $ 2,000 you've just lost 80% of your account balance
Example 2: (100:1 Leverage or 10 Lots)
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:
10 lots
1 pip = $100 dollars
100 pips = 100 * 100 = $10,000
Total= balance + profit
= 10,000+ 10,000
= $20,000 you've just doubled your account balance
If you accrue a loss of 20 pips the loss in dollars is
10 lots
1 pip = $100 dollars
20 pips = 20 * 100 = $2,000
Total= account balance - loss
Total= 10,000 - 2,000
Total = $ 8,000 you've just lost 20% of your account balance
Example 3: (10:1 Leverage or 1 Lot)
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 lots
1 pip = $10
100 pips = 100 * 10 = $1,000
Total= balance + profit
= 10,000+ 1,000
= $11,000 you've just added 10% profit to your account balance
If you make a loss of 20 pips the loss amount in dollars is
1 lots
1 pip = $10
20 pips = 20 * 10 = $200 dollars
Total= account balance - loss
Total= 10,000 - 200
Total = $ 9,800 you've just lost 2% 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 higher the leverage option used the higher the risks. This is one of best leverage rules not to trade with more than 5:1 leverage ratio.
Best leverage guidelines: It's always recommended to stay below 10:1 leverage which is 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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