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How Leverage Increases Forex Trading Profits and Loses

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


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

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



NB: This is the Leverage used not the Maximum leverage, If a Forex broker gives you 100:1 leverage, but you only trade 0.1 lot the used leverage you are using is 10:1, But if you trade 1 contract then the you will use is 100:1 which is equal to Maximum(100:1).


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: (100:1 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 trading account balance


If you make a loss of 100 pips the loss in dollars is

1 lot

1 pip = $10

100 pips = 100 * 10 = $1000


Total= account balance - loss

Total= 1000 - 1000

Total = $ 0 you have 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 in dollars is

0.5 lots

1 pip = $5

100 pips = 100 * 5 = $500


Total= balance + profit

= 1000+ 500

= $1,500


If you make a loss of 100 pips the loss in dollars is

0.5 lots

1 pip = $5

100 pips = 100 * 5 = $500


Total= account balance - loss

Total= 1000 - 500

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





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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 in dollars is

0.2 lots

1 pip = $2

100 pips = 100 * 2 = $200


Total=balance + profit

= 1000+ 200

= $1,200


If you make a loss of 100 pips the loss in dollars is

0.2 lots

1 pip = $2

100 pips = 100 * 5 = $200


Total= account balance - loss

Total= 1000 - 200

Total= $800 you have just lost 0.2 of your trading account balance




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


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


In Forex 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 2 lots for every $100,000 in their Forex trading account.

 

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