Trade Forex Trading

How Leverage Increases Forex Trading Profits and Loses?

If you as trader have a $1,000 dollar account with leverage 100:1 you can buy a maximum of 1 contract/lot which is equivalent to $100,000 contract(1 Standard lot).

We figure profits and losses here with three examples of leverage on a $1,000 account.

  • 1 lot(100:1)
  • 0.5 lots(50:1)
  • 0.2 lots(20:1)

Note: This is the Leverage being used, not the highest leverage. If a online broker gives you 100:1 leverage, but you only trade 0.1 contract/lot, the leverage you're using is 10:1. However, if you trade 1 contract, you'll use 100:1, which is the Maximum(100:1).

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

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

For 1 lot one pip equals $10 dollars

If you make a profit of 100 pips, the calculation of the profit in 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 trading account balance

If you accrue a loss of 100 pips the loss in dollar terms is

1 lot

1 pip = $10 dollars

100 pips = 100 * 10 = $1000

Total = account balance - loss

Total= 1000 - 1000

Total = $ 0 you've just lost your trading account balance

Example 2 :(50:1 Leverage or 0.5 Lots)

For 0.5 lots 1 pip equals $5

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

0.5 lots

1 pip = $5

100 pips = 100 * 5 = $500 dollars

Total = balance + profit

= 1000+ 500

= $1,500 dollars

If you accrue a loss of 100 pips the loss in dollar terms is

0.5 lots

1 pip = $5 dollars

100 pips = 100 * 5 = $500

Total = account balance - loss

Total= 1000 - 500

Total= $500 you've just lost half of your trading account balance

Example 3: (Leverage 20:1 or 0.2 Lots)

For 0.2 lots 1 pip equals $2

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

0.2 lots

1 pip = $2

100 pips = 100 * 2 = $200 dollars

Total=balance + profit

= 1000+ 200

= $1,200 dollars

If you accrue a loss of 100 pips the loss amount in dollar terms is

0.2 lots

1 pip = $2 dollars

100 pips = 100 * 5 = $200

Total = account balance - loss

Total= 1000 - 200

Total= $800 you've just lost 0.2 of your account balance

From the example mentioned above, you realize that the more leverage you use, the bigger the gains or losses, and the less you use, the smaller the gain or loss.

Consequently, it is prudent to employ reduced leverage to mitigate potential exposure. Greater leverage ratios translate directly into amplified risks. Adhering to leverage principles suggests avoiding usage beyond a 5:1 leverage ratio for trading.

Regarding leverage stipulations for trading, maintaining a ratio below 10:1 is consistently advised, although even this level is considered elevated: most accomplished money managers opt for a 2:1 leverage, meaning they only commit to two lots for every one hundred thousand dollars held in their account.

Get More Tutorials and Lessons & Courses:

Forex Broker