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

How Leverage Increases Profits and Losses?

If you have a 1,000 dollar account with leverage 1:100 you as a trader 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 as a trader can buy a maximum of 4 lots which is equivalent to 400,000 dollars Forex contract(4 Standard lots).

Let us calculate FX profits and losses based on 2 examples of used leverage, based on $1,000 dollars 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 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 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 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 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/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 of the leverage rules that specifies that traders should not use more than 5:1 leverage when trading.

In money management leverage guidelines: It is advisable to keep below 10:1 leverage which is still high, most and many professional money managers use 2:1 meaning that they trade only 2 lots for every $100,000 dollars in their account.

More Tutorials and Lessons:

Trade Forex Trading

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

How Leverage Increases Profits and Losses?

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

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