How Leverage Increases Forex Trading Profits and Loses
If you have a 1000 dollar Forex trading account with leverage 100:1 you can buy a maximum of 1 lot which is equal to 100000 dollars Forex contract(1 Standard lot).
Let us calculate Forex profits and losses based on three examples of leverage, based on $1,000 Forex account:
- 1 lot(100:1 Leverage)
- 0.5 lots(50:1 Leverage)
- 0.2 lots(20:1 Leverage)
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 leverage you are using is 10:1, But if you trade 1 contract then the leverage used is 100:1 which is equal to Maximum Leverage.
So the leverage referred in this example is the leverage used based on the volume of trade that you have opened.
Forex Leverage 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= account balance + profit
Total= 1000+ 1000
Total= $2000
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 Forex trading account
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Forex Leverage 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= account balance + profit
Total= 1000+ 500
Total= $1500
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 - profit
Total= 1000 - 500
Total= $500 you have just lost half of your Forex trading account
Forex Leverage Example 3: (20:1 Leverage 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= account balance + profit
Total= 1000+ 200
Total= $1200
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 - profit
Total= 1000 - 200
Total= $800 you have just lost 0.2 of your Forex trading account
From the above example you can see that the more leverage you use the greater the profit or loss and the less the leverage 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.
It is always advisable to stay below 5:1 leverage which is still high, most professional money managers use 2:1 leverage meaning they trade only 2 lots for every $100,000 in their Forex trading account.
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