Trade Forex Trading

How Do I Calculate Leverage in Forex 1:400 and 1:100 Leverage

How Leverage Increases Profits & Loses?

If you, as a trader, have a $1,000 account with leverage of 100:1, you can buy a maximum of 1 contract/lot, which equals a $100,000 contract (1 Standard lot).

If a trader manages a $1,000 account with a leverage ratio of 400:1, they can acquire a maximum of 4 lots, equating to a contract value of $400,000 (4 Standard lots).

Let us calculate Forex profits and losses based in 2 examples of used leverage, based on $1,000 trading 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 contract/lot the used leverage you're using is 100:1, But if you trade 4 contracts then the leverage you'll use is 400:1 which is equivalent to Maximum leverage (400:1).

The example in this guide talks about how much you can borrow based on the size of the trade you started.

Example 1: (400:1 Leverage )

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

The computation of the trading profit in dollars, assuming a gain of 100 pips, is as follows:

4 lots

1 pip = $40

100 pips equals 100 times 40 equals $4,000

Total = balance + profit

= 1000+ 4000

= $5,000 you've just doubled your account balance 5 times

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

4 lots

1 pip = $40 dollars

20 pips = 20 * 40 = $800

Final Tally = account capital minus deficit

Total= 1000 - 800

The final balance is $ 200, signifying that you have depleted 80% of your account's trading capital.

Example 2: (100:1 Leverage)

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

The computation of the trading profit in dollars, assuming a gain of 100 pips, is as follows:

1 lot

1 pip = $10

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

Total = balance + profit

= 1000+ 1000

= $2,000: you've now doubled your money in your trading account.

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

1 lot

1 pip = $10

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.

You can see from the example above that using more leverage means your profits or losses can be higher, and using less leverage means they are lower.

It's thenceforth better to use less leverage so as to cap trading risks involved. The higher the leverage ratio used the greater the risk. This is one concept of leverage guidelines not to use more than 5:1 leverage ratio.

Regarding money management constraints on leverage: It is prudent to maintain ratios below 10:1, which itself is considered aggressive: most established fund managers typically employ leverage of only 2:1, meaning they trade just two standard lots for every $100,000 held in their capital.

To Learn More about Leverage & Margin - Study the Topics Listed Below:

Leverage and margin covered

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Forex Broker