How Do I Calculate Leverage in Forex 1:400 and 1:100 Leverage
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 equal to $100,000 contract(1 Standard lot).
If you have a $1,000 account with leverage 400:1 you can buy a maximum of 4 lots which is equivalent to $400,000 contract(4 Standard lots).
Let us calculate Forex profits and losses based on two examples of used leverage, based on $1,000 account:
NB: This is the Leverage used not the Maximum leverage, If a online broker gives you 400:1 leverage, but you only trade 1 lot the used leverage you're using is 100:1, But if you trade 4 contracts then the leverage you will use is 400:1 which is equivalent to Maximum leverage (400:1).
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: (400:1 Leverage )
For 1 lot 1 pip equals $ 10
If you make a profit of 100 pips the calculation of profit in dollars is:
4 lots
1 pip = $40
100 pips = 100 * 40 = $4,000
Total= balance + profit
= 1000+ 4000
= $5,000 you have just doubled your account balance five times
If you make a loss of 20 pips the loss in dollars is
4 lots
1 pip = $40
20 pips = 20 * 40 = $800
Total= account balance - loss
Total= 1000 - 800
Total = $ 200 you have just lost 80% of your account balance
Example 2: (100:1 Leverage)
For 1 lot 1 pip equals $ 10
If you make a profit of 100 pips the calculation of profit in dollars is:
1 lot
1 pip = $10
100 pips = 100 * 10 = $1000
Total= balance + profit
= 1000+ 1000
= $2,000 you have just doubled your trading account balance
If you make a loss of 20 pips the loss in dollars is
1 lot
1 pip = $10
20 pips = 20 * 10 = $200
Total= 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 and less you use the lesser the profit or losses.
It's hence better to use less leverage so that to minimize the risks involved. The higher the leverage used the higher the risk. This is one of the leverage rules not to trade with more than 5:1 leverage.
In leverage rules: It's always advisable to stay below 10:1 which is 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 & Margin - Read the Topics Below:
Leverage & Margin Discussed
