What am i not getting with this calculation of leverage?

Hi all!

Hope someone can clarify this for me! Much appreciated!

Let us say we have a balance of 10 000 and we decide to leverage it up.

So if we use 1:400, the 10 000 is up to 4 000 000.

We dont want to risk more then 2% so thats 200.

We use a fixed stop loss at 40, so to calculate our lot size and pip value we simply take 200 divide it by our sl at 40 and we get 5$pr pip. So a minilot at 10 000 is around 1$ therefor telling us to to enter with 5, 50 000.

Is this correct? Because if it is…

what if we just use 1:100. We do the same calculation, still only risking 2% of 10 000 and a sl set at 40. Basically the same expept that we have 1 000 000 instead of 4 000 000.

But what is the difference here?

Lets say the 1:400 and the 1:100 are two seperate accounts. Both of them have 10 trades in a row where they are stopped out for 40pips. Seeing as its the same pip value on both accounts, risking 2% they’re down 10X200 so 2000$ on both accounts right?

The downside continue and they get stopped out on 10 more trades, thats 2000 more on each account and they’ve lost 4000 or 40% of their balance.

But the 1:100 leveraged account wich totaled 1 000 000 has now infact lost 1 000 000, 20 X 50 000. While the other with 1:400 should have 3 000 000left.

I must be off on something here??

Leverage does not change your account balance. If you have an account which allows you to use UP TO 400:1 leverage, it simply means that your forex dealer will set aside 0.25 % (that’s one-quarter of 1 percent) of the notional value of each trade as MARGIN.

Yes, it is. Five mini-lots x 40 pip risk per mini-lot x $1 per pip = $200 risk on this trade = 2% of your $10,000 account balance.

As I said before, leverage does not change your account balance. You don’t have $1,000,000 or $4,000,000 in either of your examples. You have a $10,000 account in each case.

In one case, your forex dealer will set aside 0.25% of your 50,000 unit position as MARGIN. In the other case, he will set aside 1% as MARGIN.

Your two hypothetical accounts each started out with $10,000. Each account suffered a string of 20 consecutive losses, each loss being 40 pips on a 5-mini-lot position.

Therefore, each account has suffered $4,000 in losses, and each account now has a balance of $6,000.

The MARGIN set aside by your dealer when your various positions were opened has been returned to your account.
MARGIN is not a cost to you (in the way that spreads are a cost.)


If you’re still confused about leverage, maybe this explanation from a previous thread will help: