Leverage Calculation

I know how leverage works in terms of deposits and opening trades, but how does it work in terms of your returns?

For instance, if you have leverage at a rate of 100:1 on £1,000 therefore your balance is £100,000, how much profit do you receive if you make £5,000 profit on one trade? Do you only receive £100? or do you receive the full £5,000?

Not quite, Rob: your [U]balance[/U] is £1,000; the maximum size of the position(s) you’d be able to open is (in theory) £100,000. (In practice, a little less, allowing for margin).

But you wouldn’t want to expose more than 1% of that to risk in any individual trade, probably? So you’d effectively be opening a £1,000 leveraged trade with that, risking £10 of your account, I think (if you had no other, correlated positions open)?

If you make £5,000 profit on a leveraged position, you receive £5,000. (It wouldn’t be very easy to do that, though, with a £1,000-balance account, even with 1:100 leverage.)

Your questions are answered, and the definitions explained, in the “School” pages, here: School of Pipsology | Learn Forex Trading

On the subject of leverage and its relation to position-sizing, specifically, the first page of this thread will also help you, [B]after[/B] reading the School pages, if you read it carefully: 301 Moved Permanently.

And welcome to the forum!

I know, it was just a quick example :slight_smile: but basically, you keep all profit? (minus any fees etc.)

Thank-you, however, I completed the school in full at the end of July and have been demo trading since, however demo trading doesn’t really teach you the practice of leverage.

Leverage is nowhere related to profits. Leverage is kind of borrowed money which lets you to trade more . It is not the case that your profits will be divided by 100 as you have used 100x leverage earlier. [B]In the specified case profits would be £5000 and he will receive the full amount[/B]. Leverage is something which is trader’s risk. If a trader can make higher profits with higher leverage, he can make higher losses as well.

Leverage is a Good thing for a trader if you use it in a proper way, as a trader you need to apply Leverage as an opportunity and facility, and don’t overuse this otherwise you will face losses.

This doesn’t answer the OP’s question at all, Raj, or even pretend to … what was the purpose of your post?!

Thank-you Andrea and Lexys, I’ve been demo trading for a couple of months and have developed a system which is consistently profitable, how does leverage effect Losses though? If you take Lexys’ example above and place a leveraged trade at 100:1 with £10, therefore opening a trade at £1000, what happens if the trade moves 20 pips against you? Do you suffer losing £10 or the full value of the -20 pips?

Demo trading doesn’t teach about leverage… and I don’t fully understand the explanation in the school :frowning:

You lose 20 times the [U][I]pip value[/I][/U].

The pip value is accordance with the size (number of lots/mini-lots) of the position you’ve opened.

If you’ve opened a 1-lot trade on EUR/USD, you lose $200 because EUR/USD pip-movements have a fixed value, [B]regardless of your own leverage[/B], of $10 per pip per lot.

So, if you’ve opened a 1-mini-lot trade on EUR/USD, you lose $20 for the same reason (you’re trading one tenth of the position-size in the previous example).

[I]The key concept is the words in bold, above. Regardless of what proportion of the position-opening money you’ve effectively “borrowed” from the broker to open the position (i.e. regardless of your leverage) your wins/losses are subject to the [U]pip value[/U], and on EUR/USD that’s [U]always[/U] $10 per pip per lot or $1 per pip per mini-lot[/I]. You don’t “share” that with the broker.

The principle is the same as buying a house with a mortgage. Whatever proportion of the purchase price you borrow from your mortgage-company (broker), when you sell the house (close the position) and repay the mortgage you take all of the profit/loss yourself; the broker isn’t involved in that. Does this make sense?

No, it doesn’t teach you about the [I]concept[/I] of leverage, really. And it’s a surprisingly difficult concept to explain.

I hope the answer above, and maybe the thread linked to in my earlier post, will help?

Leverage is not related to returns or profits. It is a kind of additional money provided by the broker which gives a chance to trade with greater amount.
In the above case profits would be £5000 and the person will receive the full amount.