How to Calculate Leverage in 1:500 and 1:100 Leverage Ratio
How Leverage Increases Profits and 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 dollars contract(1 Standard lot).
If you have a 1,000 dollar account with leverage 500:1 you as a trader can buy a maximum of 5 lots which is equivalent to 500,000 dollars contract(5 Standard lots).
Let us calculate profits and losses based in 2 illustrations of used leverage, based on $1,000 trading account:
NB: This is the Leverage used not the Maximum leverage, If a broker gives you 500:1 leverage, but you only trade 1 lot the used leverage you're using is 100:1, But if you trade 5 contracts then the leverage you'll use is 500:1 which is equal to 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)
For 1 lot one pip equals $10 dollars
If you make a profit of 100 pips the calculation of trading profit amount in dollars is:
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 accrue a loss of 15 pips the loss amount in dollars is
5 lots
1 pip = $50 dollars
15 pips = 15 * 50 = $750
Total= account balance - loss
Total= 1000 - 750
Total = $ 250 you've just lost 75% of your account balance
Example 2: ( 100:1 Leverage )
For 1 lot 1 pip equals $10 dollars
If you earn a profit of 100 pips the calculation of 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 account balance
If you accrue a loss of 15 pips the loss amount in dollars is
1 lot
1 pip = $10 dollars
15 pips = 15 * 10 = $150
Total= account balance - loss
Total= 1000 - 150
Total = $ 850 you've just lost 15% 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 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 higher the risks. This is one of 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 leverage which is still high, most and many professional experienced money managers use leverage 2:1 meaning that they trade only 2 lots for every $100,000 dollars in their account.
To Read More about Leverage & Margin - Read the Lessons Listed Below:
Leverage and Margin Described
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