Trade Forex Trading

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

How Leverage Increases Profits and Losses?

With a $1,000 account with leverage of 1:100, you may purchase a maximum of one contract/lot, which is equivalent to a $100,000 Forex contract (one standard lot).

If you have a 1,000 dollar account with 1:400 leverage, you can buy a maximum of 4 lots, which equals a 400,000 dollar Forex contract (4 Standard lots).

Let's calculate potential FX profits and losses using two examples of leverage application, assuming a $1,000 account size:

Keep in mind: This is the Leverage being used, not the Maximum leverage that's possible. If a broker online says you can use 1:400 leverage, but you only trade 1 contract, then you're using 1:100 leverage. However, if you trade 4 contracts, then you'll use 1:400 leverage, which is the same as the Maximum leverage you could use (1:400).

So the illustration referred in this guide below is talking of the leverage used based on the volume of the trade transaction that you have opened.

Example 1: (1:400 Leverage or 4 Lots)

For 1 contract/lot 1 pip equals $10

If you earn a profit of 100 pips, the calculation of the profit in terms of dollars is:

4 lots

1 pip = $40 dollars

100 pips = 100 * 40 = $4,000

Total = balance + profit

= 1000+ 4000

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

If you make a loss of 20 pips the loss amount in dollars is

4 lots

1 pip = $40

20 pips = 20 * 40 = $800 dollars

Total = account balance - loss

Total= 1000 - 800

Total = $ 200 you've just lost 80% of your account balance

Example 2: (1:100 Leverage or 1 Lot)

For 1 lot 1 pip equals $10 dollars

If you make a profit of 100 pips, the calculation of the profit in terms of dollars is:

1 lot

1 pip = $10 dollars

100 pips = 100 * 10 = $1000

Total = balance + profit

= 1000+ 1000

= $2,000 you've just doubled your account balance

If you accrue 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 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 profits & losses.

It is therefore recommended that you as a trader use less leverage so that you can minimize the risks involved. The higher the leverage that you use the higher your trading risks. This is one concept of the leverage rules that specifies that traders should not use more than 5:1 leverage when trading.

For efficient money management, professional traders often adhere to lower leverage ratios like 2:1 - only trading two contracts for every $100,000 in their account - to minimize risks.

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