How Much Leverage To Use In Forex – The terminology used by participants in the Forex market can be confusing for new traders. But anyone who trades to earn money should understand these concepts. Below we’ll look at key concepts like leverage and lot sizes on Forex and see what a pip is.
Leverage and lot size are different concepts in Forex, but there is some connection between them. Let’s see what leverage is and what it means.
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Leverage means that traders borrow money from affiliated Forex brokers or third parties. with this financial support They can open trades more efficiently without using leverage.
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A lot is a contract that is measured in base currency. Therefore, the number of lots or lot portions determines the size of the open trades.
Leverage does not affect contract size and price. However, the concept of leverage plays an important role in determining a trader’s position size. The more leverage The more a trader is able to buy or sell a large number of lots that are many times more than his own money.
Above we discussed what are lots and leverage. The link between the two concepts is the pip (short for percentage in pips), which represents the smallest part of a trading instrument’s change in value.
In other words, the pip is the smallest standard measure by which currency prices can change. In the foreign exchange market, 1 pip usually equals $0.00001 in pairs with the US dollar.
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For example, oil and stocks There are two characters after the decimal point. so the last number The second (second after the decimal point) is the pip for these assets.
Let’s look at the concept of pip through an example, this way we can clearly see the relationship between lot size and leverage in Forex. Let’s say we have a direct quote of EURUSD at 1.18699, which means that 1 euro is worth 1.18699 USD.
If this price increases by one point (maximum 1.18700), the value is $1. will be reduced compared to the euro Because now you have to pay an additional $0.00001 for 1 Euro.
The standard size of one contract for most brokers is 100,000 units, 1 unit of EURUSD is 1.18699 USD.
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Let’s say an investor buys 0.1 lots, so the contract size will be $11 869.9 (100,000 * 0.1 * 1.18699). Assuming the exchange rate of this pair increases by one point. Then the contract price of the same size will be $11,870.0.
Investors can buy more with leverage. Let’s say our traders use 1:100 leverage and can multiply their positions 100 times – they will not buy 0.1, but 10 lots. With such a large position, the cost of 1 pip would be 10 USD.
This example clearly shows how leverage affects pip value through trade size. The more leverage The more positions a trader can open, the more. the greater the position The higher the value of one point
Important! The size of one lot shown in base units is usually not set by the customer. But it depends on the requirements of the liquidity provider.
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We can see from the example that there are completely different lot sizes for different asset classes and trading instruments. It uses the 100,000 standard lot for the currency pair and the nano lot for gold if you look at cryptocurrencies. Offers clients only 1 large volume of Bitcoin and Ethereum! Detailed information on contract sizes for each trading instrument can be found here.
It should be remembered that the cost of a position does not depend only on the number of units in the contract. But it also depends on the value of the underlying asset or the currency in which these units are represented.
In the example above, we count 0.1 lot for the EURUSD pair as 10,000 euro units in dollars. Other tools calculate using the same principle.
For example, a position on XAUUSD with a lot of 100 would be 100 troy ounces in US dollars.
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Similarly, for a contract of 1 GBPJPY equal to 100,000 units, the trade value will be 100,000 British Pounds against the Japanese Yen.
What does all this mean for Forex market participants? by cross-rate purchases only (currency pairs that are not quoted against the US dollar). but also the value of the quoted currency will decrease.
You can find the most detailed information about each asset in the trader’s personal account. can be accessed without registration To do this, go to the “Trading” section, select the desired trading instrument, click “Instrument Information” and scroll down to Instruments. “Additional Information”
Leverage is a concept that is closely related to margin. It is a financial tool that allows traders to trade positions larger than their trading account size.
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You have deposited 5 000 USD into your balance. You have opted for 1:20 leverage, so you can open all positions 20 times on your account = 100,000 USD.
Want to know more about leverage and how it works? Then read the complete start guide here. Difference and relationship between leverage and lot size in Forex
Let’s reiterate that Leverage does not affect the value of a single contract. The standard contract in currency will be one hundred thousand units at any leverage.
However, leverage affects the amount of money a trader has. To see how Forex lot size and leverage affect the real value of a trade. Let’s look at the calculation formula with and without leverage.
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Therefore, we see that the contract size is directly proportional to the trade value. This means that when the lot size or volume increases. The value of the trade has also increased.
The leverage ratio is inversely proportional to the trade value. and when the amount of leverage increases The value of the trade will decrease.
IMPORTANT: There are different recommendations for using leverage for different trading instruments. It depends on the conditions of the liquidity provider that the broker works with.
The broker uses leverage for metals, oil, indices, cryptocurrencies and stocks. This is to reduce the trade value by also setting a margin percentage. You can find this parameter in the terms of the trading instrument.
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Therefore, in the open position depending on the asset You must use the percentage of actual value or amount divided by the leverage set by the trader in the account settings:
Margin trading is trading with a broker. Therefore, leverage is applied to open trades. Margin for opening positions is calculated by the formula:
Margin percentage (fixed amount) is the leverage that the broker provides when trading metals. which has a gross profit margin of 1%
The margin amount for opening this position is 2% of its actual value, which is 8.98 USD:
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The above formula may seem complicated. If you want to know how to calculate leverage and lot size as easily as possible. and estimate potential profit. Here’s the answer: you can use leverage and lot size calculator.
Use the lot size and leverage calculator below to calculate leverage and margin to open positions for different instruments. All you have to do is enter the values you want for your trade and click “Calculate”. All calculations will be displayed below. including margin amount
What is the difference between lot size and leverage? How are these two factors related? If you have read this article Now you know the correct answers to these questions.
I have prepared for you this short article with the most useful information and a summary of its conclusions. Click here to download Forex lot size and leverage PDF.
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Although the amount of leverage does not affect the size of the contract. but will increase the purchasing power of the account It allows you to buy more lots and reduce margin size. The size of the contract directly affects the size of your site. So it’s the final value.
The information in this article will work best if you try to put it into practice. Calculate the turnover by hand and use the calculator. This will help you understand leverage and contract sizes – the basis for every forex trader.
For a deeper understanding I recommend opening trades of different volumes on the demo account on the easiest and most comfortable platform. Demo accounts are available here without registration. And you can see how the current profit and loss varies with the value of the contract.
Also here you can create multiple demo accounts with different leverage. will give you a look at how
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