Lot, Leverage and Margin Explained

Lot

When opening a order in Forex, you have to deal with such concept as “lot” . Lot size is the first thing you are asked to indicate in the order to buy or sell currencies online.

 

forex-lots leverage

 

Knowing the value of a lot is very important, because only this way you will be able to calculate the amount of the transaction and, consequently, profits can be expected.

A Lot is calculated in base currency units, so you should always take this into account before carrying out operations and choosing leverage for trading.

1 lot in Forex is 100 000 units of base currency, in this case we should not forget that you will buy these units in the deposit currency, so to buy 1 lot in the currency pair EUR / USD, you will need at least 130 thousand dollars, if the exchange rate for the current It stands at 1.3000 dollars per euro.

Buying 0.1 lots is worth 1 dollar profit in one point of the positive price movement, in order to open such a trade, you will need 13 000 dollars.
Given that the maximum leverage that a broker offers is usually 500, the trade should be made on your own deposit, an amount equal to 26 dollars.

26 x 500 = 13 000 = 0.1 lots movement in 1 point will bring $ 1 profit.

Buying 1 lot would require $ 260 of your own deposit. But this is only with the maximum leverage of 1:500. In real trading is also commonly used leverage of 1: 100 or even 1:50.

You can also trade micro lots – 0.01 (1000$)

You can trade with even fewer resources using the forex cent accounts. The approach to trade in this case, is completely different, and even the amount of $ 1 can be used for trading.

 

Leverage

The most important characteristic of margin trading is to provide leverage to the trader. Through this mechanism you significantly increase your trading capital and may qualify for a serious profit.

Any financial leverage implies an increase in capital.

Leverage – is the ratio of the volume of transactions to the value of client deposit. By adjusting its value, you can affect the amount of the bargain.

Example:

Suppose you have deposited $ 200. These are the money you plan to trade on Forex.

Leverage usually varies from 50 to 500. Let’s say in our case, the size of the shoulder is 1 to 100, that is the guarantee for lending is only 1%. You could say that your deposit via credit can be increased 100 times.

Therefore, the maximum possible amount of the transaction is: 200 $ x 100 = 20 000 $. With this trading capital, you can earn an average of $ 100-200 per transaction, that you will agree, is quite a lot.

Without margin trading and leverage such a deal would have been impossible.

 

What is margin trading?

Thanks to margin trading, we can make transactions with currency in the Forex market.

On the foreign exchange market are conducted auctions for the sale and purchase of foreign exchange contracts. However, traders do not aim to buy the real currency, they are only interested in the exchange rate difference. It can be obtained only by the margin trading.
The term “margin” refers to the pledge, which must provide the trader to get a loan for a certain amount. Therefore, margin trading is based on the issuing of virtual credit bail money, which are placed on deposit in dealing center.

Buying or selling currencies in the Forex market does not require the presence of a large commercial capital. Each operation is performed on a currency conditions, short-term lending.

Thus the main difference between the margin loan from the simple fact is that provided by the sum of several times the size of the deposit and is only required to carry out speculative transactions in a particular market.

Margin trading principle is particularly in demand for currency and stock markets.

We are interested in the Forex market, so we give the following example:

  • The trader made a prediction and concluded that the exchange rate of the US dollar against the euro will rise.
  • To execute the transaction, it is necessary to sell the currency on the contract for the Euro dollars. But the standard lot on Forex for this pair is 100 000 dollars. Without dealing center we can not do transactions, because it gives us the opportunity to make the deal even if we do not have a big sum.
  • To sell a contract for 100 000 Euro, we just need to have a deposit not more than 2 000 $ (if leverage is 1:50). Of course, this technique allows the trader to increase the volume of transactions on the account having a small amount.

 

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