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 as a trader can buy a maximum of 1 lot which is equal to $100,000 dollars contract(1 Standard lot).
If you have a 1,000 dollar account with leverage 200:1 you as a trader 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 2 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 illustration referred in this guide below is talking of the leverage used based on the volume of the trade transaction which you've 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 the profit in terms of dollars is:
2 lots
1 pip = $20
100 pips = 100 * 20 = $2,000
Total= balance + profit
= 1000+ 2000
= $3,000 you've just doubled your account balance three times
If you make a loss of 20 pips the loss amount in dollars is
2 lots
1 pip = $20
20 pips = 20 * 20 = $400
Total= account balance - loss
Total= 1000 - 400
Total = $ 600 you've 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 the profit in terms of dollars is:
1 lot
1 pip = $10
100 pips = 100 * 10 = $1000 dollars
Total= balance + profit
= 1000+ 1000
= $2,000 you've just doubled your trading account balance
If you accrue a loss of 20 pips the loss amount in dollars is
1 lot
1 pip = $10 dollars
20 pips = 20 * 10 = $200
Total= account balance - loss
Total= 1000 - 200
Total = $ 800 you've just lost 20% of your account balance
From the above example you as a trader can see the more leverage you use the greater the profits or losses and 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 rules not to trade with more than 5:1 leverage ratio.
In money management leverage rules: It is advisable to keep below 10:1 leverage which is also still high, most professional money managers use 2:1 meaning that they trade only 2 lots for every $100,000 in their account.
To Learn More about Leverage and Margin - Read the Tutorials Listed Below:
Leverage & Margin Discussed
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