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

How Leverage Increases Forex Profits and Losses?

If you have a 1,000 dollar account with leverage 1:100 you can buy a maximum of 1 lot which is equal to 100,000 dollars Forex contract(1 Standard lot).

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

Let us calculate Forex profits and losses based on two examples of used leverage, based on $1,000 account:

NB: This is the Leverage used not the Maximum leverage, If a broker gives you 1:400 leverage, but you only trade 1 lot the used leverage you are using is 1:100, But if you trade 4 contracts then the leverage you'll use is 1:400 which is equal to Maximum leverage(1:400).

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

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

For 1 lot 1 pip equals $ 10

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

4 lots

1 pip = $40

100 pips = 100 * 40 = $4,000

Total= balance + profit

= 1000+ 4000

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

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

4 lots

1 pip = $40

20 pips = 20 * 40 = $800

Total= account balance - loss

Total= 1000 - 800

Total = $ 200 you have just lost 80% of your trading account balance

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

For 1 lot 1 pip equals $ 10

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

1 lot

1 pip = $10

100 pips = 100 * 10 = $1000

Total= balance + profit

= 1000+ 1000

= $2,000 you have just doubled your account balance

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

1 lot

1 pip = $10

20 pips = 20 * 10 = $200

Total= account balance - loss

Total= 1000 - 200

Total = $ 800 you have just lost 20% of your trading account balance

From the above example you can see that the more leverage you use the greater the profits or losses & less you use the lesser the profit or losses.

It is therefore better to use less leverage so that to minimize the risks involved. The higher the leverage used the greater the risks. This is one of leverage rules not to trade with more than 5:1 leverage.

In leverage rules: It is always advisable to stay below 10:1 which is still high, most professional money managers use 2:1 meaning they trade only two lots for every $100,000 in their trading account.