What are Lots, Pips, and Leverage
There are so many concepts in trading! Beginner traders can easily be overwhelmed with all of them. We’ve prepared for you a universal guide to the main trading definitions and their application to make you confident enough on Forex.
What is a Lot and its Size
Everything is simple. A lot is just some currency units. To know the size of a lot, you should understand that one standard lot equals 100,000 base or account currency units.
Alongside a standard lot, there are two more types – mini and micro. A mini lot equals 10,000 units when micro – 1,000 units. Before opening a trade, you have to decide the number of money you can spend.
Besides a lot, while trading, you may face with such terms as leverage and a pip.
What is the Leverage in Trading
You have already known that for trading EUR/USD, you need $100,000. It can be a great amount of money. However, everything is not so bad as it may seem. A Forex broker suggests you a way to benefit on Forex – leverage.
Leverage is a borrowed capital for an investment provided by a broker and amplified returns from a trade. You do not have to invest all this money by yourself – you may borrow them from your broker. For trading one standard lot for a pair, the deposit should be equal to $100,000. As the standard leverage is 1:100, you may deposit only $1,000, and the broker will cover the rest.
The leverage size usually depends on the broker of your choice. Check the leverage from the FBS broker to know your potential.
How to Calculate Pips in Forex
A pip is a well-known term in the field of trading. You may see it in various analytical articles for sure when it comes to pairs rising or declining. Thus, such statements appear, it definitely affects the amount of money a trader can earn on trading.
A pip is a percentage in point. It reflects the smallest currency pair changes. As a rule, decimal points are used in counting pairs. To make it clear, USD/JPY is quoted as 109.70. The last decimal of price or quotation is a pip. When USD/JPY changes from 109.70 to 109.85, the amount of change will be 15 pips.
To count one pip, you should look at the exchange rate of the pair.
Look at the counting process for USD/JPY:
Let’s count a non-based-on-USD pair – EUR/USD:
What is the Connection Between Lot, Pip, and Leverage
To use your knowledge in practise, you should know how all these concepts are correlated with each other. To calculate your profit beforehand you should know that leverage 1:100 increased your potential. To count the possible result of EUR/USD trading with 1:100 leverage, use the following information:
Imagine you trade the EUR/USD pair with 100,000 lot size. You deposited $1,000. Your leverage is 1:100. You made a buy trade at 1.15, the pair went up and you closed your position at 1.1550. It means you earned 50 pips.
- A buy trade opens at 1.15 for EUR/USD and a lot size is 100,000.
- One pip is $10.
- The position closes at 1.1550. As a result, you have 50 pips.
- 50 pips bring you a $500 profit.
If you trade without leverage and deposit $1,000, you have only 0.1 per pip and earn $5.
There is basic information on lots, pips, and leverage. You have it all and can start practicing. Open an account with FBS and waste no time!