Lotsize or Position Size
The lot size is the amount or the trade volume unit. How much money a trader will invest in trading a currency pair or instrument. More clearly, the number of currency units traders will buy or sell. The table below explains the details of forex trading units.
|Lot Size||Lot Size Value||Position Size in Unit|
For example, suppose a trader wants to buy EURUSD with a standard lot of 1.00 (100,000 units). Now we will calculate the pip value for this trading.
EURUSD at an exchange rate of 1.2510 per pip value will be,
(.0001 / 1.2510) x 100,000 = $7.99
Here 100,000 units means 100,000 US Dollar.
Calculate pip value in different account currencies with other currency pairs with the pip value calculator.
Leverage is the amount of money that traders borrow from the broker in time of trading any forex currency pairs. With Forex trading, a trader with higher leverage can control the bigger amount of money in the time of trading. Leverage gets calculated based on instrument margin requirement & trader available account balance.
Based on the previous example, to buy EURUSD with 1 standard lot, the trader will control 100,000 USD value. But if the trader has $1000 in his trading account, that means he needs to borrow the rest of the money from the broker, to continue trading.
He needs to borrow at least a 100x amount of money of his trading account deposit. In the forex terminology, it gets denoted as leverage of 1:100.
Leverage always gets denoted with “:” sign.
If the trader had a 100,000 dollar in his trading account, then account leverage will be 1:1.
Why leverage is a double-edged sword?
Just think you are controlling $100,000 value of trade with $1000. Each pip worth $7.99. If EURUSD moved 100 pips in your favor. Then you will earn $7.99*100 = $799, almost 79.9% of your trading account balance.
This is the reason why leverage made forex trading so popular among financial investors. Most of the trader thinks it is a quick rich scheme. But now think the opposite, if the market moved 100 pips against you, then you will lose 79.9% of your investment. Will it be nice? Of course not.
So with higher leverage, a trader can trade higher lot trades with the lower account balance. Thus if you make a profit you will earn a great reward but if you lose the trade, then you will lose most of your account balance. Sensible traders always use lower leverage with the larger account balance.
The margin is the security money deposit, for the traders to borrow money from the broker with the leverage. In the above example, you were trading a $100,000 position with a $1000 deposit by 1:100 leverage. That $1000 deposit is the margin money.
For lending money from the forex broker, security money deposit is mandatory.
To open trade with certain trading lots for certain currency pairs, traders need to calculate margin first, based on their account balance. Margins are usually get counted with percentage based on the account balance. A broker generally requires a 2% margin for opening EURUSD orders with 1:50 leverage.
For example, if a trader wants to trade 1 lot of EURUSD, then he needs to have $1231 in his trading account balance with 1:100 leverage.
With higher leverage like 1:500, a trader only needs a $246 account balance to trade $10 per pip of EURUSD.
Margin required / Account margin
This term indicates the amount of money available to your account for starting a trade.
This term indicates the amount of money that is currently locked into your open trade position.
If a trader has a $500 trading account and opened trade with a margin of $300, then that $300 is the Used margin.
Free margin / Usable margin
The amount of money available to the account for placing a new trade.
A margin call occurs when current open position value crossed the available free margin, or when you do not have enough money on your trading account to open a new trade with preferred lot size.
If an open position value exceeds the free margin or free margin goes into a minus mode, then the forex broker will automatically close your trade and you will receive margin call notification.
Trade after a margin call
To start trading again, you need to deposit money to your trading account. Otherwise, you can lower the lot size to trade in smaller trading volume.
Receiving a margin call for a trader indicates bad trading skills or irresponsible trading. A good trader should never come to this situation and always take care of his/her account with lower risk.