Lot and Leverage in Forex Trading 

Deriv » Lot and Leverage in Forex Trading 

A Lot and Leverage in Forex trading is a currency unit. One standard lot is 100,000 units of the base. There are also the micro and mini lots. A mini lot stands for 10,000 units and a micro lot equals 1,000 units. The pip value for trading one minim lot of EUR/USD is $1, while the pip value for trading one micro lot of EUR/USD is $0.10. Before you open a trade you need to first make up your mind about the amount of money you can afford to risk on trading.

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A lot stands for the size of a currency that you trade and the side of the position. The maximum lot size that can be used by the trader will depend on the leverage and account balance. 

What is leverage?

You need up to $100,000 for trading EUR/USD. This will be the case if there is nothing like leverage. The introduction of leverage into Forex trading makes it a lot easier to get funds to trade Forex. By using leverage, you will not need up to $100,000 to trade EUR/USD. The leverage will help to cut down how much you end up spending. Leverage is the money you borrow from the broker. It will allow you to open a large trading position with a very small amount of money. The size of the trading position you can open depends a great deal on the leverage you get. Leverage of 50:1 means that the trading position you open can be multispeed by up to 50. So, you will have the opportunity to make 50 times the normal profit and also be exposed to making 50 times the loss you can incur normally.

While leverage can help you to make a lot of profit, it can also cause you to make a huge loss.

How leverage connects with a lot

Before you can use the knowledge of lot and leverages, you need to know how the two of them relate. A leverage of 1:100 will increase the profit you can make tremendously. If you trade EUR/USD, for example, using a 100,000 lot, and you deposit $1000, and you use a leverage of 1:100, then you buy at 1.15 and you close the position at 1.2550. This means that you make a profit of 50 pips. A 50 pip profit translates to a $500 profit with leverage of 1:100. If you do not use leverage for the trade, the profit you can record will only be $5 if you use 0.1 lot.

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Trading leveraged products such as Forex and CFDs may not be suitable for all investors as they carry a high degree of risk to your capital. It is really important that you do not trade any money that you can’t afford to lose because regardless of how much research you have done, or how confident you are in your trade, there will always be a time that you lose.