Leverage Forex Trading in Practice

By this point you will hopefully have an understanding of Forex leverage and what it means for you in terms of margin and position sizes. In here we are going to learn to trade Forex using an example scenario which takes advantage of leverage. This should allow you to calculate profit/loss using our knowledge of pip values, lots and leverage together.

We have an account size of $10,000 and no open trades, so our full $10,000 is available as margin. The maximum leverage allowed for this particular account is 50:1, so we must contribute at least 2% of the value of any positions we open. We decide to take a USD/CAD long trade – buying US Dollars and selling Canadian Dollars.

Our FX broker is quoting us a bid price of 1.0095 and an offer price of 1.0098. As buyers we will be paying the offer. We open a long position of half a standard lot, or five mini lots which is $50,000 at the price of 1.0098. With a limit of 50:1 Forex leverage we must put up $1000 of our margin towards the $50,000 total, with the remaining $49,000 being loaned to us by our broker. If you are unsure about quote reading and bid/offer prices, see our Forex trading basics lesson.

After about half and hour price has risen to 1.0123 and is showing signs of a reversal. Here we take profit and close out the position. The quote from out broker as we close out has a bid price of 1.0123 and an offer of 1.0126. We are now selling to cancel out the buy we made earlier when initiating the trade, we sell at the bid of 1.0123.

In summary, we have bought USD/CAD at 1.0098 and then sold at 1.0123. The different between these two prices is 0.0025 which equals 25 pips.

So using Forex leverage, how much profit have we made for our account from the 25 pips we netted in this trade?

We use the offer price (the price at which we bought) to calculate pip value. To do this we divide one pip (0.0001) by the offer which was 1.0098 and then multiply by our lot size of 50,000 (we used half a standard lot, or one mini lot).

0.0001/1.0098 * 50,000 = $5.049 pip value.

$5.049 * 25 pips = $126.22 trading profit

Overall we have added a profit of $126.22 to our total account balance of $10,000.

Ok, so hopefully this will answer many beginning traders’ questions such as ‘what is Forex leverage trading?’ The examples in this lesson will enable you to complete your own Forex leverage calculations so you can see how account size, margin, pips and lot sizes are all related.