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 as a trader 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 as a trader can buy a maximum of 4 lots which is equivalent to $400,000 dollars contract(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 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'll use is 400:1 which is equivalent to Maximum leverage (400:1).
So the example referred in this guide below is talking of the leverage used based on the volume of the trade that you've opened.
Example 1: (400:1 Leverage )
For 1 lot 1 pip equals $10
If you earn a profit of 100 pips the calculation of trading profit amount in dollars is:
4 lots
1 pip = $40
100 pips = 100 * 40 = $4,000 dollars
Total= balance + profit
= 1000+ 4000
= $5,000 you've just doubled your account balance five times
If you accrue a loss of 20 pips the loss amount in dollars is
4 lots
1 pip = $40 dollars
20 pips = 20 * 40 = $800
Total= account balance - loss
Total= 1000 - 800
Total = $ 200 you've just lost 80% 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 trading profit amount in 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 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 trading account balance
From the above example you as a trader can see that the more leverage you use the greater the profits or losses and less you use the lesser the profit or loss.
It's therefore better to use less leverage so as to cap the risks involved. The greater the leverage ratio used the greater the risk. This is one of the leverage guidelines not to use more than 5:1 leverage ratio.
In money management leverage guidelines: It's always recommended to stay below 10:1 ratio which's also still high, most professional fund managers use 2:1 leverage meaning that they trade only two lots for every $100,000 in their account.
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Leverage & Margin Discussed
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