David Waring

In our last lesson we looked at how to determine how much leverage you are using when trading currency pairs in which the US Dollar is the base currency in the pair. In today's lesson we are going to continue our free forex trading course with a look at how to determine how much leverage you are using when the US Dollar is not the base currency in the pair.

As we have learned in previous lessons, in this particular demo account we are trading a contract size of 100,000 of the base currency in the pair. When the US Dollar is the base currency in the pair thats $100,000 per contract which, as our accounts are based in US Dollars, makes the leverage calculation fairly easy.

When the base currency is not the US Dollar however the computation for the amount of leverage employed becomes a bit more difficult, as in these cases we are trading 100,000 of of that currency, not the US Dollar. In short, what this means is that to get the amount of leverage utilized in these cases we must convert the trade size into US Dollars, and then divide that by the equity in our account.

To help illustrate this concept lets look at a couple of examples. Lets say I am trading 2 contracts of EUR/USD with an account balance of $100,000. As we have learned in previous lessons 2 contracts of EUR/USD is 200,000 Euros against the equivalent amount of US Dollars.

As we also learned, the rate in the dealing rates window for the EUR/USD or any other currency pair for that matter, is how much of the second currency in the pair it takes to buy 1 of the first currency. As of this lesson EUR/USD is trading at 1.5976 so 1 Euro is worth $1.5976. As we are trading 200,000 Euros we multiply 1.5976 times our 200,000 Euro position size to get our position size in dollars which equals $319,520.

Now that we know our position size in US Dollars, to get the amount of leverage utilized on this trade, we simply divide $319,520 by our $100,000 account balance, which gives us a leverage ratio of 3.20 to 1.

The process to calculate the leverage employed for currency pairs which do not include the US Dollar at all is the same, but be sure to use the rate for the base currency and the US Dollar to calculate the position size in US Dollars.

As an example here if was trading 1 contract of EUR/JPY then I am trading 100,000 Euros against the equivalent amount of Japanese Yen. As our account is in US Dollars we need to calculate how large a position this is in US Dollars, so we don't really care about the Japanese Yen in this situation. With this in mind we simply take the rate of the Euro US Dollar currency pair, which as of this lesson is $1.5976, and multiplying this by our position size of 100,000 Euros. We then take the result of this calculation ($159,760) and divide it by our account balance of $100,000, which gives us a leverage ratio of 1.60 to 1.

To help make this process easier I have created a spreadsheet which you can find attached to this lesson if you are watching on InformedTrades.com. If you are watching on YouTube I have included a link to this lesson in the description section to the right of this video.


For the homework assignment tonight I encourage you to calculate the leverage utilized on several trades in currency pairs which do not include the US Dollar in the pair, and feel free to post your results in the comments section of this lesson.

Thats our lesson for today, in our next lesson we will look at the different order types available in the forex market so we hope to see you in that lesson. As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

Attached Files

Leverage Calculator.xls (28.5 KB, 1775 views)

kawola17

Thanks for the calculator David!! Really makes things easier, I just have to update the EUR/USD to get the leverage for all the exchange rates.

Thanks again!

-Bill

David Waring

My Pleasure Bill glad you are finding it useful.

Best Regards,
Dave

jcvictory

Dave,

I'm having trouble finding the CAD/USD pair. I have found the pair where the USD is the base pair (USD/CAD - right?) but not the one with the Loonie as the base. Help.

James

David Waring

Hi James,

In the spot forex market currency pairs are standardized and quoted only one way. So there is no CAD/USD in the spot forex market only USD/CAD. This shouldn't make a difference however from a trading standpoint as you can do everything with the pair quoted as USD/CAD that you could if it was quoted CAD/USD.

Let me know if that does not make sense or if you have any other questions.

Best Regards,
Dave

jcvictory

So in the spreadsheet when it lists CAD/USA, the current market rate to plug in would be the USD/CAD rate (which is 1.01079) as of this morning?

James

jcvictory

I think this would represent leverage in a mini-account of $3,000.00. Please correct me if I'm wrong.

EUR/USD rate = 1.5790, Amount of Base Currency = 10,000.00, Amount traded in USD = $15,790.00, Leverage = 5.263333333

James

David Waring

Hi James,

This looks correct to me.

Best Regards,
Dave

David Waring

Hi James,

Yes my apologies I had typed it incorrectly in the spreadsheet by mistake. The sheet has been updated with the correct formatting now.

Best Regards,
Dave

arun

Hi there,

Assume Iam a short term trader and place my stop loss 50 pips below my entry point(EUR/USD).
50 pips= $1000
1 pips=$20

with 20:1 levarage,my trade size will be $200,000. this trade will require $10,000 in my trading account.

If the trade is stopped(hit my stop loss price), do i lose $1000 only or do i get a margin call for $20,000(50*20*20)?

thanks for your help