Leverage, Lot size, Pips

I thought I had a good understanding of this but I guess I don’t. A standard lot size means that .01 pip is worth $1 and that doesn’t change. But if I’m trading on a broker website with 500:1 what does that mean to me and how does it relate ?

confused

Joy D.

Good question! First off yes, if you have 1 lot .1 pip = 1$ … the 500:1 leverage ( which by the way is MASSIVE amount of leverage, usually never need more than 100:1 which is still high in my opinion ) but that 500:1 leverage means you can trade more for less, but given its risker too.

Example: I use Oanda to trade

50:1 leverage on EUR/USD means I need to have minimal of 2% of what I want to trade in my account

Meaning, that If I want to trade 1 lot which equals 100,000$ I need have MINIMAL 2000$ in my account, now if it goes below that 2000$ and I’m trading 1 lot, I will get a margin call which can close out my trade resulting in a premature loss on my end. So simply you want like 2500$ so you have the 500$ extra as a cushion for this example.

Now that’s for 50:1 leverage if we drop to 20:1 leverage its now 5% of what I want to trade,
so 1 lot equals 100,000$, means I need to have 5000$ in my account to trade 1 lot.
So the lower the leverage the more you need in capital be able to trade. I’m in the USA were our maximum is 100:1 I believe or its 50:1 not 100% sure. But 500:1 I would imagine means you only need like .5% in your account of what you want to trade. Now I would check with your broker on this, because as I stated I use Oanda. So my leverage/margin requirements could be much different than yours.

But in a nutshell that’s how it works, the 1 lot doesn’t change the amount the cash the pips generate, the 500:1 leverage though just means you can trade that 1 lot with significantly less money than if you had a 50:1 leverage account. Just keep in mind that it also increases risk because sure you can trade 1 lot with say 500$ but if price goes down 50 pips, you lost all 500$. So be very careful using such high leverage.

Also note that I said EUR/USD, EACH currency usually has a different margin requirement of their own, for example in the USA the GBP is now 5% requirement minimal and most EUR are 2%, so be aware of this too, usually your broker has a chart that can tell you exact requirements for each currency pair and have a margin calculator to see what is required to trade those pairs.

Hope this helps!

  • Jason