Trade Forex Trading

Leverage Example 1:20 - Example Leverage 1:20 or 0.2 Lots

If you have a 1,000 dollar account and your leverage is 1:20, you can buy a maximum of 0.2 lots, which is the same as a 20,000 dollar contract (0.2 Standard lots).

Let's figure out the profits and losses using three examples of leverage, based on having $1,000 dollars in the account now.

  • 0.2 lots (1:20)

NB: This is the Leverage used not the Maximum leverage, If a online broker gives you 1:20 leverage, but you only trade 0.1 contract/lot the used leverage you are using is 1:10, But if you trade 0.2 contract then the you'll use is 1:20 which is equivalent to Maximum leverage (1:20).

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

Example 3: (Leverage 1:20 or 0.2 Lots)

For 0.2 lots 1 pip equals $2 dollars

If you earn a profit of 100 pips the profit amount in dollars is

0.2 lots

1 pip = $2 dollars

100 pips = 100 * 2 = $200

Total=balance + profit

= 1000+ 200

= $1,200 dollars

If you accrue a loss of 100 pips the loss amount in dollars is

0.2 lots

1 pip = $2 dollars

100 pips = 100 * 2 = $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 the more leverage you use the greater the profits or losses and less you use the lesser the profits & losses.

It's thence better to use less leverage so that to minimize risks involved. The greater the leverage ratio used the greater the risks. This is one concept of the leverage rules not to trade with more than 1:5 leverage ratio.

In trading leverage rules: It is advisable to keep below 1:10 leverage ratio which is also still high, most and many professional money managers use 1:2 leverage meaning that they only trade 2 contracts/lots for every $100,000 dollars in their account.

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