Pips Lots Leverage and Margins

At Bforex we know the world of Forex trading is filled with trading concepts and term. Here we have gathered some of the most common Forex terms and their meanings:

Pips

Pip stands for percentage interest point and is the generally accepted smallest unit showing the variation in the prices of financial instruments. It is usually equal to 0.0001, but the currency market coverage of all courses of the Japanese yen is equal to 0.01.

The exact value of an individual pip depends on the currency being traded. For example, the Euro is measured out to four decimal places, thus each pip equals 1/100th of a cent. That’s not to say that each pip is worth 1/100th of a cent in Profit – to calculate this, we need to introduce two other terms, lots and leverage.

Lots

The Lot is the smallest standardized and "indivisible" amount of an asset, which is authorized for trading in financial and commodity markets.

Banks and other liquidity providers trade currency in lots. A standard lot is 100,000 (100K) units of the currency being traded, while a mini lot is 10,000 (10K) in the Forex market.

Leverage

Leverage allows Forex traders to control more currency in a trade than they have deposited in their trading account. This is where the real power of Forex trading lies. Trading with the leverage system wisely can work in your favor, and bring you big profits.

If your margin is 1%, this means that the leverage is 1:100, i.e. you need only have 10 euros in your account so you can buy 1,000 Euro on the currency market. Thus, it would only take 100 units to control 1 mini lot (10K) in the fx market or 1000 units to control 1 standard lot (100K).

For example, if you buy 1 mini lot of the EUR/USD currency pair, then your account equity would increase or decrease by $1 for each pip of movement. If you buy 1 standard lot, then your account would increase or decrease $10 with each pip of price movement. Example 1: if the EUR/USD pair increases by 10 pips (10×$1) from 1.5000 to 1.5010 with mini lots, then this is a $10 increase. Example 2: if the EUR/USD pair increases by 10 pips (10×$10) from 1.5000 to 1.5010 with standard lots, then this is a $100 increase.

Trading on Margin

The Margin is the difference between your capital used as collateral and the amount that you can trade. This is the amount of collateral required by Forex traders to maintain their open positions on the Forex market. Unlike stocks and commodities, there are no margin calls in Forex. If an account falls below the margin requirements, then all open positions are automatically closed.

For example, if an fx trader buys one mini lot of the EUR/USD pair for 1.50 at 1:100 leverage, then they will need $150 of their account in margin to maintain that open position. If the price moves against the Forex trader by one pip, then they will need $151 and if the price moves against the fx trader by 10 pips, then they will need $160.

If, on the other hand, a Forex trader buys 1 standard lot of the EUR/USD pair for 1.50 at 1:100 leverage, then they will need $1500 of their account in margin to maintain that open position. If the price moves against the fx trader by one pip, then they will need $1510. Or if the price moves against them by 10 pips, then they will need $1600.

Next Article: Placing Orders
 

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