How Leverage Increases Forex Trading Profits and Loses?

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

Let us calculate profits and losses based in three illustrations of used leverage, based on $1,000 trading 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 broker gives you 100:1 leverage, but you only trade 0.1 lot the used leverage you're using is 10:1, But if you trade 1 contract then the you'll use is 100:1 which is equal to 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 dollars

Total= balance + profit

= 1000+ 1000

= $2,000 you've just doubled your 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 earn 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 earn 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 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 or loss.

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

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

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How Leverage Increases Forex Trading Profits and Loses?

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

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

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