How Do I Calculate Leverage in 1:300 and 1:100 Leverage
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 equivalent to $100,000 dollars contract(1 Standard lot).
If you have a 1,000 dollar account with leverage 300:1 you as a trader can buy a maximum of 3 lots which is equivalent to 300,000 dollars contract(3 Standard lots).
Let us calculate profits and losses based in 2 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 300:1 leverage, but you only trade 1 lot the used leverage you're using is 100:1, But if you trade 3 contracts then the leverage you will use is 300:1 which is equivalent to Maximum leverage (300:1).
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 1: (300:1 Leverage or 3 Lots)
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:
Three lots
1 pip = $30 dollars
100 pips = 100 * 30 = $3,000
Total= balance + profit
= 1000+ 3000
= $4,000 you've just doubled your account balance four times
If you accrue a loss of 20 pips the loss amount in dollars is
3 lots
1 pip = $30 dollars
20 pips = 20 * 30 = $600
Total= account balance - loss
Total= 1000 - 600
Total = $ 400 you've just lost 60% of your account balance
Example 2: (100:1 Leverage)
For 1 lot one pip equals $10 dollars
If you make a profit of 100 pips, the calculation of the profit in terms of dollars is:
1 lot
1 pip = $10 dollars
100 pips = 100 * 10 = $1000
Total= balance + profit
= 1000+ 1000
= $2,000 you've just doubled your account balance
If you make a loss of 20 pips the loss amount in dollars is
1 lot
1 pip = $10
20 pips = 20 * 10 = $200 dollars
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 that the more leverage you use the greater the profits or losses & less you use the lesser the profit or loss.
It is henceforth better for you to use less leverage so that you minimize the risks. The higher the leverage ratio that you use as a trader, the higher the risks. One of the leverage guidelines emphasized by experienced traders is neve to use more than 5:1 leverage in forex trading.
In money management leverage guidelines: It is always advisable to keep below 10:1 leverage which is still high, most and many professional money managers use 2:1 meaning that they trade only 2 lots for every $100,000 dollars in their account.
To Learn More about Leverage and Margin - Study the Tutorials Listed Below:
Forex Leverage & Margin Discussed
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