Trade Forex Trading

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 $1,000 and can borrow 100 times that amount, you can buy at most 1 contract/lot, which is the same as a $100,000 contract (1 Standard lot).

With leverage of 10:1, a $1,000 account may only purchase a maximum of 0. 1 lots/contracts, which is equal to 10,000 contracts (0. 1 standard lots/contracts).

Let's undertake a calculation of potential FX profits and losses contrasting two scenarios of leverage application, both based on an account size of $1,000:

NB: This is the Leverage used not the Maximum leverage, If a online broker gives you 100:1, But if you trade 0.1 contracts then the leverage you'll use is 10:1 which isn't equal to Maximum leverage(100:1).

So the example referred in this tutorial below is talking of the leverage used based on the volume of the FX trade that you have opened.

Example 1: (10:1 Leverage or 0.1 Lots)

For 1 contract/lot, 1 pip is equivalent to $10

If you achieve a profit of 100 pips, the calculation of the profit amount in dollars is:

0.1 lots

1 pip = $1

100 pips = 100 * 1 = $100

Total = balance + profit

= 1000+ 100

= $1,100 you've just made 10 % profit in your account balance

If you lose 20 pips, the dollar loss is $20.

0.1 lots

1 pip = $1 dollars

20 pips = 20 * 1 = $20

Final Tally = account capital minus deficit

Total= 1000 - 20

Total = $ 980 you've just lost 2% of your account balance

Example 2: (100:1 Leverage)

Ten dollars is equal to one pip for one lot.

The calculation of trading profit in dollars if you earn 100 pips is as follows:

1 lot

1 pip = $10 dollars

Calculation: 100 pips equates to 100 multiplied by 10, equaling $1000.

Total = balance + profit

= 1000+ 1000

Equals $2,000, So You Doubled Your Account

If you lose 20 pips, the dollar loss is $20.

1 lot

1 pip = $10 dollars

20 pips = 20 * 10 = $200

Final Tally = account capital minus deficit

Total= 1000 - 200

Total funds depleted equal $ 800: this represents a 20 % erosion of your active trading capital.

From the above example you can see that the more leverage you use the greater the profits or losses and less you use the lesser the profits/losses.

It is advisable to use less leverage to reduce trading risks. The higher the leverage ratio applied, the greater the associated risk. As a guideline, avoid applying leverage ratios higher than 5:1 to safeguard your trading positions.

In trading, experts suggest staying under 10:1 leverage, which is still quite high. Many pros use just 2:1, trading only two lots per $100,000 in their account.

To Learn More About Margin and Leverage - Review the Subjects Listed Below:

Discussing Leverage and Margin

Discover More Topics and Lessons:

Forex Broker