Leverage, Margin and Lots

2014-07-05_170620In order to make this small 100th of a cent worth something, your broker offers you leverage. This essentially magnifies your trade size. You would place a trade using so much of your own money, called Margin, and your broker will magnify the trade by whatever the leverage is. If your broker offers your 100:1 leverage, this means they will Increase your trade size by 100 times.
You have to trade chunks of money called Lots. Different brokers offer you different minimum lot sizes you can trade.
There are 3 different sized lots, each make the value of a pip worth more or less.

1 Micro Lot = approximately $0.10 a pip

1 Mini Lot = approximately $1.00 a pip

1 Lot = approximately $10.00 a pip

Opening a “micro account means you have the abilityto trade lot sizes as small as you can get. This is good for small accounts. Most brokers will allow micro lot sizes and let you open an account for as little as $250.00.

To trade a lot, you have to put up some of your own money, this is called margin. How much margin required depends on the leverage. If you are trading an account that offers 100:1 leverage, you will need about $10 of margin to trade 1 micro lot. If you are trading an account that offers only 50:1 leverage, you will need about $20 of margin for the same micro lot.

This margin is held in good faith by your Forex broker until the trade is closed. You can gain more or less, or you can lose more or less than the margin you have put up. Whatever the case, the margin is returned to you after the trade Is closed. Again, this Is all done automatically through your broker. You can trade as many lots as you wish, providing you have the margin to cover it.

##A note about US brokers :

Recently, a Forex governing body called the CFTC (Commodities Futures Trading Commission) has implemented several restrictions to US based brokers. One of these restrictions is to limit leverage to 50:1. This means that your broker can only magnify your trade 50 times as opposed to the usual 100 times. This should not be an Issue In your trading, so don’t worry about it too much.

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