How Do I Calculate Leverage in Forex 1:10 and 1:100 - Leverage in Forex 1 10 and 1 100
How Leverage Increases Profits & Loses?
If you have a 1,000 dollar account with leverage 100:1 you can buy a maximum of 1 lot which is equivalent to $100,000 dollars contract(1 Standard lot).
If you have a 1,000 dollar account with leverage 10:1 you can buy a maximum of 0.1 lots which is equal to 10,000 dollars contract(0.1 Standard lots).
Let us calculate FX profits & losses based on two 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 100:1, But if you trade 0.1 contracts then the leverage you will use is 10:1 which is not equal to Maximum leverage(100:1).
So the example referred in this below is talking of the leverage used based on the volume of the trade that you have opened.
Example 1: (10:1 Leverage or 0.1 Lots)
For 1 lot 1 pip equals $10
If you earn a profit of 100 pips the calculation of profit in dollars is:
0.1 lots
1 pip = $1
100 pips = 100 * 1 = $100 dollars
Total= balance + profit
= 1000+ 100
= $1,100 you have just made 10 % profit on your account balance
If you accrue a loss of 20 pips the loss in dollars is
0.1 lots
1 pip = $1 dollars
20 pips = 20 * 1 = $20
Total= account balance - loss
Total= 1000 - 20
Total = $ 980 you have just lost 2% of your account balance
Example 2: (100:1 Leverage)
For 1 lot 1 pip equals $10 dollars
If you make a profit of 100 pips the calculation of profit in dollars is:
1 lot
1 pip = $10 dollars
100 pips = 100 * 10 = $1000
Total= balance + profit
= 1000+ 1000
= $2,000 you have just doubled your account balance
If you make a loss of 20 pips the loss in dollars is
1 lot
1 pip = $10 dollars
20 pips = 20 * 10 = $200
Total= trading account balance - loss
Total= 1000 - 200
Total = $ 800 you have 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/losses.
It is henceforth better to use less leverage so that to minimize the risks involved. The higher the leverage option used the higher the risk. This is one of leverage guidelines not to trade with more than 5:1 leverage option.
In trading leverage guide-lines: It is advisable to keep 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.
To Learn More about Leverage and Margin - Read the Topics Below:
Leverage and Margin Discussed
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