I have read quite a bit about the above terms including in the Pip school. I am keen to do Forex trading and have opened a demo account and done over 20 trades conservatively (I think) increasing my account from $1,000 to $1,035 in 3 weeks. But I am still quite confused and unclear about the above terms and it does my head in.
Here is an example I read online. I will copy that here and give you my interpretation of it. Please let me know if my understanding is correct. Sorry for my confusion/ignorance.
(a) “Leverage ratios are commonly in the range of 100:1 to 10:1. If the ratio is 100:1, the trader must reserve 1% of the trade value as margin.”
[The leverage in my account is is 200:1.
Does this mean that I must reserve 1/200=0.5% of my trade value of my deposit of $1000=$5 as margin for this trade?
For the next trade, does it mean that the amount to reserve should be 0.5% of $(1000-$5)=(0.5/100)x$995=$4.97?]
(b)“For example, consider the trader who enters a full size trade for USD/JPY. That trade has a value of $100,000 US Dollars. If the leverage offered by the broker is 50:1, the trader must maintain and commit 2% of the trade value in his margin account, or $2,000.”
[My deposit is $1,000. That is a micro lot as I understand it. The leverage is 200:1. So basically this is the same question as (a) and means I should maintain and commit 0.5% x$1,000=$5?]
© If the USD/JPY trade gains in value, the trader’s account balance will increase by the amount of the profit (thus providing additional funds that the trader might use to enter additional trades).
However, if the trade loses funds, even temporarily, the trader must commit additional margin funds to the trade, thus reducing the amount in the margin account that would otherwise be available to commit to other trades."
[Can you please give me a quick example to make this clear to me please?]
(d) On the MT4 platform, while entering a trade, it asks us to enter “VOLUME” with choices such as 0.01, 0.02 etc. What does this refer to? The lot “size” or the individual trade size?
Thank you. Sorry for too many questions and my ignorance. I am a bit slow to understand stuff. Cheers.