How Do I Calculate Leverage in 1:200 and 1:100 Leverage Ratio
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 200:1 you can buy a maximum of 2 lots which is equal to 200,000 dollars contract(2 Standard lots).
Let us calculate profits and losses based on two examples of used leverage, based on $1,000 trading account:
NB: This is the Leverage used not the Maximum leverage, If a broker gives you 200:1 leverage, but you only trade 1 lot the used leverage you are using is 100:1, But if you trade 2 contracts then the leverage you will use is 200:1 which is equivalent to Maximum leverage (200:1).
So the example referred in this below is talking of the leverage used based on the volume of the trade which you have opened.
Example 1: (200:1 Leverage or 2 Lots)
For 1 lot 1 pip equals $10 dollars
If you earn a profit of 100 pips the calculation of profit in dollars is:
2 lots
1 pip = $20
100 pips = 100 * 20 = $2,000
Total= balance + profit
= 1000+ 2000
= $3,000 you have just doubled your account balance three times
If you make a loss of 20 pips the loss in dollars is
2 lots
1 pip = $20
20 pips = 20 * 20 = $400
Total= trading account balance - loss
Total= 1000 - 400
Total = $ 600 you have just lost 40% of your account balance
Example 2: (100:1 Leverage)
For 1 lot 1 pip equals $10
If you earn a profit of 100 pips the calculation of profit in dollars is:
1 lot
1 pip = $10
100 pips = 100 * 10 = $1000 dollars
Total= balance + profit
= 1000+ 1000
= $2,000 you have just doubled your trading account balance
If you accrue 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 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 cap the risks involved. The greater the leverage ratio used the greater the risks. This is one of the leverage guide-lines not to trade with more than 5:1 leverage option.
In money management leverage guide-lines: It is advisable to keep below 10:1 leverage which is also still high, most professional money managers use 2:1 meaning they trade only two lots for every $100,000 in their account.
To Learn More about Leverage and Margin - Read the Topics Below:
Leverage & Margin Discussed
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