It is quite surprising to witness that most of the people interested in forex spend a lot of time in studying forex trading. Evidently it is found that they never understand the basic concepts. It is also evident that most of the peoples are in this business with the aim of having extreme gains with little or no knowledge. In this post, the readers will be able to go through with two most important technical terms in forex trading- forex lot size and leverage.
Let us begin with Lot Size.
A lot refers to a bundle of units of trade. It also refers to the size of the trade which the trader is making in the forex market. In the past, spot forex was traded only in lots. There are different types of lots available in forex market; they are mentioned below:
Lot Number of units
Now let us understand this with an example. The example is based on Mini lot.
It is true that most of the traders expect a minimum of at least 1 mini lot to do trading.
The normal leverage percentage with the mini lot is 1:40.
$250 x 40 = $10,000,
$10,000 is the 1/10 value of a standard forex, so for every 1 Pip trader can get a profit of $1. Similarly if market loses 1 Pip, then the trader will also lose $1.
Now lets us understand leverage.
Leverage can be used by both the companies and the investors. It is basically used in order to enhance the returns which can be offered on investment. Financial institutions or organizations use leverage to finance their assets. In forex, trading leverage is one of the most important concepts.
So this was the explanation related to forex lots and leverage.
Let us understand forex trading pips leverage with an example.
Before initiating the example let me clear the concept of leverage once more and how it is used in forex trading.
Brokers lend 100 times of what the traders have bought forward to buy any contract, and this called leverage.
Let’s take a mini lot and see that how leverage works on it.
A trader needs 1 mini lot to initiate a trade, and a mini lot is worth $10,000, which suggests that the trader is trading with 1:40 leverage.
So, $250 x 40 = $10,000.
$10,000 is 1/10 value of standard lot in forex. Thus traders can earn $1 for every 1 Pip.
Forex lot size and margin are also considered as the most important part of forex trading business.
Margin is the good faith deposit required by your forex broker in order to cover the position which has been entered into forex market.
Used margin: This refers to the amount of money which is available in the account of the trader and it is the money used in open trades.
Suppose, if a trader has $6000 capital in his/her account and then that trader has $1000 in an open trade then $1000 will be his/her used margin.