When you use leverage to trade the forex market your returns can be much higher than most typical non leveraged investments or non-leveraged trading. You only have to put up a small amount of money to control a much larger amount. Small movement can result in much larger percentage profits. Losses can be managed with stop orders and moving stops to breakeven. To open a leveraged position, you only need to deposit a fraction of the total trade value, called the margin.
Example Leveraged Forex Trading Return Calculation #1:
Account balance: $10,000 USD
Pair: EUR/USD Buy
Deposit Amount for Trade: $1000 One Standard Lot
Leverage: 100:1
Position size: $100,000 which is $1000 x 100
Scenario: Market moves +75 Pips In Your Favor
Profit: $750
Return on Investment: 75% which is $1,000 profit divided by $1,000 initial investment
Total Return on Account: Since account starting balance is $10,000 return on account including non-margined funds is $750 divided by $10,000 which is 7.5%.
If you make 4 trades in one month with 75 Pips return each on EUR/USD your account balance will be $13,000 at the end of the month which is a 30% return on the total account.
USD IMAGES READY
Example Leveraged Forex Trading Return Calculation #2:
Account balance: $10,000 USD
Pair: GBP/JPY Sell
Leverage: 50:1
Deposit Amount for Trade: $2000 One Standard Lot
Position size: $100,000 which is $2000 x 50
Scenario: Market moves +200 pips in your favor
Profit: $133 sounds way too low
Return on Investment: 6.6% which is $133 profit divided by $2,000 initial investment.
Total Return on Account: Since account starting balance is $10,000 return on account including non-margined funds is $133 divided by $10,000 which is 1.33 %.
If you make 2 trades in one month with 1.33% return each on GBP/JPY your account balance will be $10,266 at the end of the month which is a 2.66 % return on the total account.
GBP/JPY IMAGES READY
Risk Management
these examples are simplified to focus on the mechanics of leverage in forex gains.