Trade Forex Trading

How to Calculate Leverage in 1:500 and 1:100 Leverage Ratio

How Leverage Increases Profits and 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).

Say you have $1,000 and you use 500:1 leverage. You can buy up to 5 lots, which equals a $500,000 contract - 5 standard lots.

Let's figure out the possible profits and losses in two examples of using leverage, using a trading account with $1,000 in it:

NB: This is the leverage you are actually using, not the maximum leverage. If an online broker offers you 500:1 leverage but you only trade one contract or lot, your used leverage is 100:1. But if you trade five contracts, your used leverage is 500:1, which is the same as the maximum leverage (500:1).

So the example illustration referred in this tutorial below is talking of the leverage used based on the volume of the trade which you have opened.

Example 1: (500:1 Leverage or 5 Lots)

Ten dollars is equal to one pip for one lot.

The calculation of trading profit in dollars if you earn 100 pips is as follows:

5 lots

1 pip = $50 dollars

100 pips = 100 * 50 = $5,000

Total = balance + profit

= 1000+ 5000

= $6,000 you've just doubled your account balance six times

If you lose 15 pips, the dollar loss is $15.

5 lots

1 pip = $50 dollars

15 pips = 15 * 50 = $750

Final Tally = account capital minus deficit

Total= 1000 - 750

Total = $ 250 you've just lost 75% of your account balance

Example 2: ( 100:1 Leverage )

One lot means one pip is worth 10 dollars

If you achieve a profit of 100 pips, the calculation of the profit amount in dollars is:

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 15 pips, the dollar loss is $15.

1 lot

1 pip = $10 dollars

15 pips = 15 * 10 = $150

Final Tally = account capital minus deficit

Total= 1000 - 150

Total = $ 850 you've just lost 15% of your account balance

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 is advisable to use lower leverage to manage trading risks effectively. Higher leverage ratios amplify risks. A common guideline is to avoid using leverage higher than a 5:1 ratio.

In money management leverage guidelines: It's always recommended to stay below 10:1 leverage which is still high, most and many professional experienced money managers use leverage 2:1 meaning that they trade only 2 contracts/lots for every $100,000 in their account.

To Read More about Leverage & Margin - Read the Lessons Listed Below:

Explanation of Leverage and Margin

Examine More Subjects & Explanations:

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