Definition of margin , leverage and Lot- Free Training Course in Forex – lesson 12

Definition of Lot

We remind you what we have said previously ...

If you want to buy, for example, one euro against dollar in the exchange rate of 1.4480 and regardless of the (spread) and after the purchase,  the pair moved to 1.4481.

Here we ask what is your profit?!

The answer is only $ 0.0001.

Because 1.4481 - 1.4480 = 0.0001 $ is not it!!

You must know something which is very important,

That the profession of Forex trading in spot trading in the currency means a freelancer or Lot, and, as in our previous example that the purchase or sale of one currency against the currency will not give any profit.

So you trade by buying or selling the quantities or sizes or parts or Lot to enlarge the size of profits.

There are 3 sizes of contracts appear mainly ...

The standard size of lot is $ 100,000

And mini-sized lot is $ 10,000

The size of the micro lot is $ 1,000

1 K	5 K	10 K	50 K	100 K
One contract equals 1000 units	One contract equals 5000 units	One contract equals 10.000 units	One contract equals 50.000 units	One contract equals 100.000 units
One point= $ 0.10	One point= $ 0.50	One point= $ 1	One point= $ 5	One point= $ 10
Standard lot	Mini-sized lot	Mini-sized lot	Micro- lot	Micro- lot

In addition, you can buy and sell using the size abnormal lot " Unknown Quantity" may buy or sell the lot for $ 1,500 or $ 25,000 or $ 40,000 .... Etc.

Here we explain the relationship between Lot Size and value of the deal in some detail ..

Micro Lot

Mini Lot

Standard Lot

Lot size	value of one point	Lot size	Value of one point	Lot size	Value of one point
1000 units	$ 0.10	10.000 units	$ 1	100.000 units	$ 10
2000 units	$ 0.20	20.000 units	$ 2	200.000 units	$ 20
3000 units	$ 0.30	30.000 units	$ 3	300.000 units	$ 30
4000 units	$ 0.40	40.000 units	$ 4	400.000 units	$ 40
5000 units	$ 0.50	50.000 units	$ 5	500.000 units	$ 50
6000 units	$ 0.60	60.000 units	$ 6	600.000 units	$ 60
7000 units	$ 0.70	70.000 units	$ 7	700.000 units	$ 70
8000 units	$ 0.80	80.000 units	$ 8	800.000 units	$ 80
9000 units	$ 0.90	90.000 units	$ 9	900.000 units	$ 90
				1000.000 units	$ 100

We go back to our previous example, but after buying a standard lot size of $ 100,000

Euro/dollar  in the price $ 1.4480 and the imposition of the price moves to 1.4481

(Assuming zero spread) profit will be $ 10 with moving of the price one point.

You probably wonder now how can the small investor to trade large amounts of money as soon as deposit small amounts.

Here we are going to remind you with the definition of "leverage"

Leverage

Well .. Now you want to know how to be your big profits!!

here  the purchasing role of leverage came you will not buy just 1 euro against the dollar, because it will not be profitable.

If leverage is, a power enables you of control over a large amount of money, " even your capital is small with a brokerage firm" means trading a portion of your capital and borrow the rest to help in the trade. "

How so!

The definition of Margin

Naturally brokerage firm will ask you to book a minimum amount from your balance account is known as the margin safety on the deal, and when you open your account with the brokerage firm you will have the ability to trade strongly raise according to the margin required of you for each lot intended to be traded, and vary leverage between brokerage firms of 1:50 to 1: 400

If other meaning to leverage that it is the ratio size of the amount of buying or selling used in any transaction, to the sidelines of the security deposit required.

Examples of leverage sizes..

1: 50

1: 100

1: 200

1: 250

1: 300

1: 400

For example, the brokerage firm will help you buy a pair coin-sized lot of $ 100,000 and asks you to deposit $ 1,000 only as a secure margin of the deal, as  proving a  good faith response facilities without damage to the brokerage company funds financed by the Bank, So broker books this deposit until the end of the deal.

So advertised leverage in this example is 1: 100

It Means the deposit of 1000 $ × 100 = 100.000 investor capital.

And now to the calculations:

Now we're going to provide you with some calculating examples to be able to understand what is already ...

First, a calculation to illustrate Lot ..

For example, if the U.S. dollar is the main currency first calculation would be as follows:

USD / JPY exchange rate at 119.90

(0.01 / 119.80) × Lot of $ 100,000 = $ 8.34 Per Point

USD / CHF at the exchange rate of 1.4555

(0.0001 / 1.4555) × Lot of $ 100,000 = $ 6.87 Per Point

And, for example, if the U.S. dollar is not the main currency, the account will be a little different:

EUR / USD at the exchange rate of 1.3138

How do you calculate the point value to proportion to the size of the piece, will be as follows:

(0.0001 / 1.3138) × 100.000 euro = EUR 7.61 × 1.3138 = 10 $

One point equals to $ 10 for each point in the price movement.

Thus, it is calculated, but be aware that the value of point vary from brokerage firm to another, relative to the lot size offered by, but in any case all these accounts be equipped with an automated fashion.

A calculation to illustrate the leverage and margin

Second example of the requirement margin and leverage

To open the deal in a standard account K100 to $ 100,000

You may be required margin by 1% or $ 1,000 to open one lot

If Leverage in Forex make you trade of $ 100,000 with only 1% as required margin only if leverage ratio is 1: 100

it Means that the deposit of 1000 $ × 100 = 100.000 investor capital.

To open the deal in a mini account with $ 10,000 K10

it May required of you a margin by 0.50% or $ 50 to open one lot

If Leverage in Forex make you to trader of  $ 10,000 with only 0.50% as required margin only if leverage ratio is 1: 200

it Means that the deposit of 50 $ × 200 = 10.000 investor capital.

In order to calculate the number of transactions allowed you to compare the amount of your balance at the brokerage firm

 the role says:

Total account at the brokerage firm ÷ Margin = the number of allowed transactions

For example, if your balance at the brokerage firm $ 1,000 in a mini account

And it asked you a margin 0.50% means  $ 50 margin per deal to buy the lot for $ 10,000

If you have a chance to make 20 deal , each deal with $ 50 as margin.

$ 1,000 account balance ÷ 50 $ margin = 20 allowed deal

Another example

If you have a balance of $ 5,000 in standard account this means  every $ 1,000 you have, it allows you to trade in one lot for $ 100,000 which means that this will allow you to use leverage  of $ 500,000 as a total.

Margin and Leverage

If margin met with leverage , this group may be fatal if used in a bad way!!

The Forex Trading Based on the margin increase the strength of your purchasing If you have $ 5,000 in a margin account that allows you to strongly raise up to 100:1 Here you can buy up to $ 500,000 of currency because you only have to deposit 1% as required margin for the deal.

With the larger purchasing power you can increase your total investments with less than the value of cash, but be careful because the margin trading may increase the losses in the absence of a money management intact, and we'll notify you later the importance of this lesson to detail in the management department money to be able to trade in a safe and appropriate use of leverage and the most appropriate lot size for each transaction according to the size of the head of the owner.

Warning : Trading foreign exchange based on margin carry a certain high level of risk , and it may not be suitable for all investors , and could result in higher amount of leverage to backfire against you as well as it can lead to good results for you , so before taking the decision to invest in foreign exchange you should carefully consider your investment objectives , level of experience , and risk appetite , the possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose , You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts .