Basic Trading 3 (Lots, Leverage, Margin)
I hope that many of you have a good knowledge by now. There is nothing much to think in Forex. Some are thinking it as a big issue. All you have to do is understanding with enough devotion and urge. You need a good amount of skills and training to earn a lot more in this niche. I’ m going to tell you about the management of “Trading” in this article.
You can open and close a trading as well as applying Stop loss and Take profit options. If you can’t, it’s good to read last articles. This is very important as I said earlier. Better you understand, better you have chances to earn. Read carefully. There are lots to come. These are very important aspects that I am speaking of today. It’s a shame to mention that some of the Forex teachers are not aware of these as well. Let’s learn these and apply them for our future uses.
What are the Lots?
You will meet this word in Forex more often if you are opening a trading. You may still remember that we met some numbers like, Volume = 0.1, 0.2, 0.3 when we were opening a trading. If you can’t remember, open a window in a trading in MT4 and see for yourselves. These are in Volume option. These are called a ‘Lots”. If you don’t have enough knowledge on lots, you will lose your money. Because Lots is the one which is going to show us the amount of Trading to the money we invest. If we put 10 lakhs to the stock market we are not going to buy shares of all the money at once. We invest only a part such s 1 lakh. Similarly we use lots in the Forex market for that. Let’s take a Currency Pair in the market. It is GBP/USD. Base Currency is GBP in this. USD is the other currency called, Quote currency. As there are a thousand grams for a kilogram,a lot has 100,000. But this is not 0.1 we mentioned. 0.1 is a tenth of a lot. When we get a real account a lot equals 0.01.
Lot 1 = 100,000 (Unit is a standard value. You don’t have to bother about this.)
We use the word Standard Lot for this. Not only are that but also Mini Lot, Micro Lot, Nano Lot such several Lots we come across. Those were like grams, kilograms, pounds, tons.
Lot = 100,000
Mini Lot = 10,000
Micro Lot = 1,000
Nano Lot = 100
Many people including those who teach are not familiar with these and they easily lost. Let’s use the values given above for our trading and see the importance. Imagine now GBP/USD is at 1.5800. Now you want to activate a Buy or a Sell order. Then you have to use some Lots. How many USD is required for you to buy a Lot in this scenario?
GBP Lot 1 = 100,000
100,000 x 1.5800 = USD 158,000
You can’t even think about that much. Isn’t it? You need a whole lot of money in Rupees here. In this instance, we need Leverage option. It’s very important in Forex market. We saw a lot in above example and t equals to 0.1. It becomes 0.01 in a real account. Let’s learn about Leverage now.
What is leverage?
You need a lot of money to buy a Lot in Forex market as you saw. But still you can Trade while using small amounts such as 100$. It is called Leverage. Forex Broker companies provide us these in 400:1, 200:1, 100:1, 50:1 scales. Normally we use 200:1. These are used to minimize the values. See this example.
Your leverage is 200:1. How many USD are needed for you to buy a Lot if GBP/USD is at 1.5800 now?
GBP Lot 1 = 100,000
100,000 x 1.5800
USD 158,000 /-
But when we leverage this,
158,000/200 = USD 790
In reality you have to spend 790 USD to by a GBP lot under the leverage. See how much in Rupees. But we do not buy that much at once. Its only millionaires do that. We buy from 0.1 Lots or less. We can buy down to 0.01. In a Demo account we have to spend 79USD to buy a lot and in a real account it would be 7.9 USD. You can see how the values go smaller as we trade. The amount of USD spent for Lot sizes is important in margin. You can see there is a word as Margin in this image.
Let’s see this now. If you have any problems read again. I have written these in the simplest form. I am not a writer but a Forex trader. Let’s think that we have added 100$ to your account. If you are only adding 50$, it’s better to stop now. You can try it in Demo. Calculate this and see for yourself.
Basic investment= $100 (Balance of above picture)
Lot size for the Trade= 0.01 (Smallest possible amount in window)
GBP/USD market= 1.5800
Lot 1 = 100,000
100,000 x 1.5800 = USD 158,000
158,000/200 (200:1) = USD 790
Our lot size 0.01. So 790/100= 7.9USD
We have to spend 7.9$ for a trading in Lot size 0.01.
We get the same after we close the trading. We get the value with added or subtracted adjustments according to profits and losses.
Balance = $ 100
Equity = (The net value of your Trading that is shown until you close it)
Free Margin+ 100-7.9 (Current profit or loss)
This section is very valuable. So it’s your job to read it carefully. It doesn’t matter how much we invest, it should not trespass the 50% value of the initial investment made by us. So those who start with a 100$ and finish successfully should invest another 100$ after the end. You have to trust this advice thoroughly in real accounts. If not, you’ll be lost. Deposit more money if you don’t want to be so. Read this one carefully and adopt to your trading.
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