Leverage is a feature that allows a trader to trade larger amounts of money than they have in their account by borrowing the additional amount from their broker. By using leverage, a trader can increase their profit potential but also their risk of loss. For example, with a leverage of 1:100, you can control a trade of $10,000 with only $100 in your account. However, higher leverage also increases the risk of significant losses.
What are pips?
Generally, in forex trading, currency pairs are quoted to the fourth decimal place. For example, if the price moves from 1.3324 to 1.3325, this 0.0001 move is called a pip. A pip represents a small measure of change in a currency pair in the forex market, and it is used to measure movement in the exchange rate. Traders use pips to quantify gains or losses. The value of one pip can be calculated in terms of the base currency, and it varies with the currency pair and the amount of the trade. For example, if a pip is worth $10 in a standard lot, a movement of 10 pips would result in a profit or loss of $100.
What is a lot?
In forex trading, a lot is a unit used to measure the size of a trade. There are three common types of lots:
Micro Lot: A micro lot represents 1% of a standard lot. If you are taking a risk of 1%, your buy entry would be 0.01 micro-lots, equivalent to $1.
Mini Lot: A mini lot represents 10% of a standard lot. If you are taking a risk of 10%, your buy entry would be with 0.1 mini lot, equivalent to $10.
Standard Lot: A standard lot is the full unit of trading. If you are taking a risk of 100%, your buy entry would be with a 1.0 standard lot, equivalent to $100.
For example, if a trader’s pip value is $10 and they profit or lose from a 5-pip move, it means a $50 gain or loss.
Micro Lot: 1% of the invested amount. 0.01 is 1% profit or loss.
Mini Lot: 10% of the invested amount. 0.1 is 10% profit or loss.
Standard Lot: 100% of the invested amount. 1.0 is 100% profit or loss.
Recommended Lot
The recommended lot is 0.04 micro lot, which is 4% of the invested amount (e.g., $4 on $100). “0.04 micro lot is the best lot because, in the beginning, we don’t have money management, so we can face losses.
