How to Calculate Leverage in Forex
Learning how to calculate leverage in forex is a crucial part of any forex trader’s career since it can help you become more efficient in the way you use forex leverage.
In this guide, I will break down the two ways you can calculate leverage when trading forex which are manually or with a calculator.
I personally always use the calculator since it’s a much faster way of getting a 100% accurate result when you are actively trading.
Another benefit of learning how to calculate leverage in forex is that you will soon find out the best leverage for forex for your trading strategy.
- Calculating forex leverage can be done by either using a calculator or manually with this formula (Leverage = Total Value of Trade / Margin)
- By calculating leverage, traders can gain control over their position size and therefore also the risk associated with the trade.
- By learning how risk and reward affect trading success, traders can use forex leverage better by learning how to calculate it properly.
How to calculate leverage in Forex for beginners
The easiest way to calculate leverage in forex is to use a forex leverage calculator which will immediately give you the correct result and this is something that many professional forex traders use.
The other way is to do it manually with this formula:
Leverage = Total Value of Trade / Margin
- Total value of trade is the total value of the position you’re trading (the notional value of the position).
- Margin is the amount of money required to open and maintain the trade.
Leverage is typically expressed as a ratio, such as 1:50, 1:100, 1:500, etc.
This ratio represents how many times your margin is multiplied to determine your total trade size.
For example, with a leverage ratio of 1:100, for every $1 of margin you have, you can control a trade worth $100.
How to calculate leverage in forex with example
Suppose a trader wants to open a position in the EUR/USD forex pair.
He decided to buy 10,000 Euros against the US Dollar.
The current exchange rate is 1 Euro = 1.20 USD.
The broker requires a margin of 2% for this trade.
Step 1: Calculate the total value of trade
Total Value of Trade = Number of Euros * Exchange Rate
Total Value of Trade = 10,000 Euros * 1.20 USD/Euro
Total Value of Trade = 12,000 USD
Step 2: Calculate the margin
Margin = Total Value of Trade * Margin Requirement
Margin = 12,000 USD * 0.02 (2%)
Margin = 240 USD
Step 3: Calculate forex leverage
Leverage = Total Value of Trade / Margin
Leverage = 12,000 USD / 240 USD
Leverage = 50
In this example, the beginner trader is using a leverage of 1:50.
This means that for every 1 unit of margin, they put up (240 USD), they are able to control a trade with a total value of 50 units (12,000 USD).
It’s important for the trader to manage their risk when trading with leverage since it has the potential to swing both ways.
Why do you need to calculate leverage in forex?
There are three main reasons why you would need to calculate your leverage when trading forex:
- Control your position size: When trading forex, your lot size and leverage go hand-in-hand, and with a calculator, you can quickly find the perfect position size for your trade.
- Control risk: Overleveraging is very common amongst novice traders and this usually increases the risk when trading. When calculating leverage in forex you can adapt your leverage ratio to reduce risk and trade with less exposure.
- Capital efficiency: Your capital can be used in a better way if you learn how to calculate forex leverage. Instead of using your margin requirement in one position, you can spread it out over many positions and gain exposure in more markets at the same time.
Calculating forex leverage is the first step in learning how the relationship between trade size and margin works.
Instead of always using the maximum leverage in forex trading, take control over your position size by learning how to calculate leverage.
Assessing risk and reward when calculating forex leverage
When leverage is used, it is important to learn how to find out the risk/reward ratio of your trade.
In addition to simply using our risk reward calculator, here is how you can assess risk and reward when calculating leverage:
- Estimate your potential loss: Keeping your losses in leverage trading under control is the number one factor that will keep you inside your risk/reward strategy. Keep in mind that leverage amplifies the magnitude of loss to the degree to which the ratio has been selected.
- Analyze your potential reward: Your profit potential should always be at least two times greater than your loss to stay within the limits of a healthy risk/reward scenario. Calculating forex leverage helps you understand your profit potential.
- Understand your margin requirement: The margin requirement is the amount of capital that you deposit into your forex account. By using a forex leverage calculator you will quickly find out how much margin is needed for each position.
- Consider a stop loss: The stop loss is the single most used tool to control risk in leverage trading. Control your downside with a stop loss after finding out your forex leverage calculation. By calculating your stop loss level with our stop loss calculator you can execute your trade with your risk predefined.
These steps will assist you when trying to figure out a skewed risk/reward scenario.
Calculate for margin calls and liquidation
When trading forex it is possible to calculate liquidation price to adjust for the amount of leverage used.
This calculator will show you at what price your forex position will get liquidated if the market turns against you.
By using our margin call calculator you can figure out at what price your broker will send you a margin call depending on these three factors:
- Initial purchase price
- Initial margin %
- Maintenance margin %
If these calculators are used correctly together with forex leverage, you can navigate your position sizing and avoid high-risk scenarios.
This has been a guide on how to calculate leverage in forex so you can become more effective when choosing trade size. When you know how position size, margin, and leverage work together, you can trade forex with more confidence.
It goes without saying that leverage can boost both your profits and your losses in a big way. Therefore it is wise to use it in moderation to take control over risk and manage your margin capital well.
Once you learn how to do a forex leverage calculation you will be one step closer to controlling your forex trades better.