Correlation with margin and lot size?

Is there any correlation with the trading margin a person will use and the lot size for a position?

If so could someone please explain it.

Yes. Margin is stated as x-dollars PER LOT. Let’s say your broker requires \$50 margin per mini-lot. If you trade one mini-lot, \$50 of your account balance is ear-marked for margin for the duration of your trade. In other words, you can’t use that part of your money to cover any losses which might occur. Think of the margin amount as a security deposit — you get it back when you close your position.

If you trade two mini-lots, your broker holds \$100 of your money as margin. Three mini-lots, \$150 margin, etc.

Margin and maximum allowed leverage are two sides of the same coin. \$50/mini-lot corresponds to 200:1 leverage. If your broker required \$100 margin per mini-lot, that would correspond to 100:1 leverage. The general formula for this is:

Position size divided by required margin = maximum allowed leverage.

In the example above, where you traded one mini-lot with a \$50 margin, the formula works out this way:

\$10,000 of currency divided by \$50 of margin = 200. In other words, 200:1 maximum allowed leverage.

If the base currency were GBP instead of USD, then the same margin would correspond to a higher maximum allowed leverage. I’ll leave it to you to make the actual calculation.

Clint

Thanks for the explanation.

I’m putting together a excel sheet which incorporates MM and I’m trying to put the equations together and just figure out how one can use risk %, margin, %/lot, leverage, and all that stuff into it.

I’m getting lost in the whole calculation of things. If I have a \$10,000 mini account where should I start with? The amount I wanna risk? or some other number?

I’ve got a bunch of equations in my head and having trouble bringing it all together.

If you’re risking a reasonable percentage per trade, and only have a few trades open at a time, then just ignore leverage, margin, etc…

You don’t need to worry about them. There’s no way you’ll ever get remotely close to a margin call. Trying to calculate those things is confusing and unnecessary.

Here’s a simple equation for figuring how many lots to trade. This equation works for any size account, any risk %, any currency pair, any size stop loss, and it works for standard lots, mini-lots, and micro-lots.

Number of Lots = [(Account Balance, in dollars) x (Risk %)] / [(Stop Loss, in pips) x (Pip Value, in dollars)]

First, let’s define some of the terms. [B]Number of Lots[/B], [B]Account[/B] [B]Balance[/B], and [B]Stop Loss[/B] are self-explanatory. [B]Risk %[/B] (expressed as a decimal) refers to the percentage of your entire account that you are willing to risk on this trade.

[B]Pip Values[/B] depend on lot size, and on the currency pair traded. For all currency pairs having the USD as the cross-currency (i.e., pairs of the form XXX/USD), pip values are \$10/pip for standard lots, \$1/pip for mini-lots, and \$0.10/pip for micro-lots; for other pairs, pip values vary as prices vary, and these can be found in your trading platform.

Here are some examples, using the equation above:

(1) You have a mini-account, with a balance of \$7,200. You want to risk no more than 2.5% of your account balance on a EUR/USD trade, with a 45-pip stop loss. How many mini-lots can you trade?

Number of Lots = [(\$7,200) x (0.025)] / [(45) x (\$1)] = 4 mini-lots

(2) You have a standard account, with a balance of \$23,785. You want to risk no more than 3% of your account balance on a EUR/GBP trade, with a 56-pip stop loss. How many standard lots can you trade?

Number of Lots = [(\$23,785) x (0.03)] / [(56) x (\$15.97)] = 0.8 standard lots = 8 mini-lots

(3) You have a micro account, with a balance of \$715. You want to risk no more than 2% of your account balance on a USD/CAD trade, with a 33-pip stop loss. How many micro-lots can you trade?

Number of Lots = [(\$715) x (0.02)] / [(33) x (\$0.09)]= 4.8 = 5 micro-lots (rounded up)

I hope this helps you.

Clint

Exactly what I needed! Everything makes sense now, thank you very much!

Could you expand on how leverage works with the margin value? I read it over in the school but I’m not getting a good grasp of it. Also, is there an equation for it?

Here’s how to figure the ACTUAL leverage you are using. Let’s say you have a \$10,000 mini account, and you want to enter a GBP/USD trade, with a 40-pip stop loss. Your personal rule regarding risk is: on any one trade, risk must not exceed 3% of your account balance. You crunch the numbers using the formula for number of lots, as follows:

Number of lots = (\$10,000) x (0.03) / (40) x (\$1) = 7.5 mini-lots = 7 mini-lots (rounded down)

Let’s say that you are confident about this potential trade, and you decide to put on the maximum of 7 mini-lots which your risk rule allows. Let’s evaluate leverage and margin in your trade.

You now control 70,000 units of currency (7 mini-lots x 10,000 units each). Furthermore, the currency you control is the GBP, which is worth more than the dollar. So, we need to determine the dollar-value of your position.

70,000 GBP x 1.59801 = \$111,861 (based on Friday’s closing price of 1.59801 for the GBP/USD).

In other words, you now control \$111,861 worth of currency with this trade. This is way more than the value of your account, meaning that you are leveraged. By how much? Your actual leverage used in this trade is:

[B]Actual Leverage Used = Currency Controlled, in dollars / Account Balance, in dollars [/B]

which works out to 111,861 / 10,000 = a bit more than 11:1 That 11:1 leverage figure applies to this trade regardless of what leverage your broker advertises.

What about margin? Most brokers advertise LEVERAGE (50:1, 100:1, 200:1, even 400:1), but their platforms calculate MARGIN, and monitor your total open positions according to margin, not leverage. The equations which relate margin to leverage are:

[B]Margin, per micro-lot = \$1,000 / Max. Allowable Leverage[/B]

[B]Margin, per mini-lot = \$10,000 / Max. Allowable Leverage[/B]

[B]Margin, per standard lot = \$100,000 / Max. Allowable Leverage[/B]

As an example, if your broker offers you 100:1 leverage, then the margin amount he will escrow for each mini-lot you trade, is:

Margin, per mini-lot = \$10,000 / 100 = \$100 per mini-lot

Notice that the equations given for margin apply to positions denominated in dollars. But, what if the base currency in a trade is not the USD (as in our GBP/USD example)? Most brokers do not use different margin amounts for different currency pairs. So, if your broker advertises 100:1 leverage, and applies a margin amount of \$100 to a mini-lot of USD/XXX, he will likely apply that same \$100 margin amount to EUR/XXX, GBP/XXX, or any other base currency. The result of this is that he is actually allowing you EVEN HIGHER maximum leverage on currencies, such as the GBP, which are more expensive than the USD.

This simplifies life for the broker, and for you. Now you can calculate the MARGIN USED in your trade, in your head:

[B]Margin Used = \$100 x mini-lots traded[/B]

So, in the case of our example, Margin Used = \$100 x 7 = \$700

Suppose that your broker’s spread on the GBP/USD, at the time you entered your trade, was 4.6 pips. Now, let’s walk through the arithmetic done by your broker’s platform as soon as you open this trade. I’m using FXCM’s Trading Station for this description — other brokers may use different terminology. If you were trading on the FXCM platform, as soon as you enter your GBP/USD trade, the platform would calculate Margin Used (as we did, above); and then, it would calculate the dollar-value of the spread, as follows:

4.6 pips/mini-lot x 7 mini-lots x \$1/pip = \$32.20 (the dollar-value of the spread for your 7-mini-lot position)

Then, the platform would display some new numbers: Account Balance \$10,000. Account Equity \$9,967.80. Margin Used \$700. and Usable Margin \$9,267.80. Let’s go through these numbers.

[B]Account Balance = the money that was in your account before you opened the trades which are currently open.[/B]

[B]Account Equity = Account Balance - Spreads on open trades[/B] (\$32.20 in this example). Also, as soon as your position is opened, profits (or losses) will begin being added to (or subtracted from) Account Equity.

[B]Margin Used[/B] (we have already defined this)

[B]Usable Margin = Account Equity - Margin Used[/B]. Usable Margin varies (along with Account Equity) as profits and losses occur in your open positions. Usable Margin is the portion of your account that:
(1) is available for you to use to cover margins and spreads in any additional positions you might choose to open, and
(2) is available for withdrawal from the account by you.

It’s important to understand maximum allowable leverage, actual leverage used, margins and margin-calls. Then, it’s important to MANAGE YOUR RISK so that these things don’t matter anymore, and you can forget about them.

If you keep tight control of your risk, so that a trade gone bad can cost you NO MORE THAN 2% - 5% of your account balance, then your ACTUAL LEVERAGE USED will be in the range of 5:1 to 20:1, and you will never be faced with a margin-call.

From then on, it won’t matter to you whether your broker allows you 100:1, or 200:1, or even 1,000:1 leverage. As long as he allows you significantly more leverage than you ever use, you can forget about margin amounts, margin-calls, or his advertised leverage.

Clint

Clint:

``````   Your explanation have been very helpful as well the other members.

I am using a demo with FXDD they have 0.01 to 0.05 lots, them jump to 0.1

0.01 is a mini lot I think. Today a made 92 pips with 0.01 = \$15.01 that is about 16 cent a pip?. :confused:
``````

Now how you calculate pip value with GBP/JPY using one mini lot or AUD/USD for example? I went to the school but I do not get it.

You said that one pip in a mini it is equal to \$1, I want know how can I make \$1 per pip. Sorry for my English. I am Doing my best.

Thanks

Terachon

I know how to calculate laverage, margin, lots to trade in relation of the 2%
thanks to the contribution of good members, just I need a little more about pips value.

Thanks for the detailed explanation! It is really helpful! :o

For accounts denominated in U.S. dollars, pip values depend on:

(1) the type of account you have (STANDARD, MINI, or MICRO),

(2) the CROSS-CURRENCY in the pair you are trading
(for example, the GBP is the CROSS-CURRENCY in the EUR/GBP pair, but NOT in the GBP/USD pair), and

(3) for non-USD cross-currencies, a conversion to USD, based on current market prices.

Below is a table of pip-value formulas for the most commonly-traded currency pairs, based on a MINI ACCOUNT denominated in USD. Below the table are several notes. Notes 1 and 2 tell you how to calculate pip values for STANDARD ACCOUNTS and for MICRO ACCOUNTS.

Here is an example of how to use this table. Let’s say you want to determine the value of 1 pip in a dollar-denominated MICRO ACCOUNT for the EUR/CHF pair. Find the EUR/CHF in the table, below.

The formula (for a MINI ACCOUNT) is: \$1 divided by the current price of the USD/CHF (which is 1.08032). This gives us \$0.9257.

To get the pip value for a MICRO ACCOUNT (using Note 2, below), divide this figure by 10. The final result is 1 pip = \$0.09257,
or 1 pip = 9.3 cents (rounded off).

For accounts denominated in currencies other than the USD, convert dollars to your currency based on current market prices.

My broker platform (FXCM) shows the current pip value for each pair listed in the platform, so that I don’t have do any calculations. Your broker’s platform should have a similar feature.

I hope this answers your questions about pip values.

Clint

This is incorrect. For most brokers the permissible leverage is based on the [I]value[/I] of the position, not the [I]size[/I] of it. Thus, if you are going long 100,000 EUR/USD and that’s trading at 1.30 the position has a value of \$130,000. At 100:1 permissible leverage the margin requirement is \$1300, not \$1000.

Thank you for the info.

Okay, I should re-phrase what I said.

My broker, FXCM, applies the same margin to all currency pairs.

Thus, if I have 100: 1 leverage in an FXCM account, and I go long 100,000 EUR/USD, the margin requirement is \$1,000
— not \$1,300 as rhodytrader suggested.

Your broker may have a different margin policy.

Here is a paragraph from FXCM’s Trading Station II User Guide:

Sorry, if my previous post created confusion.

Clint

You are very welcome. I’m glad to help.

Hi, thanks for the excellent posts. I have a couple of questions.

A standard lot has 100,000 or \$100,000
A mini lot has 10,000 or \$10,000
A micro lot has 1,000 or \$1,000

Here are some questions:

1. When opening the above lot account, does it matter how much money the users deposit?
2. If it does not matter, then why would the traders use one over the others?
For example, if a trader has deposited \$500, and he wants to risk 4% with a stop loss of 20, the number of lots will be …

Standard account: (\$500 x 0.04) / (20 x 10) = 0.1 standard lots
Mini account: (\$500 x 0.04) / (20 x 1) = 1 mini lots
Micro account: (\$500 x 0.04) / (20 x 0.1) = 10 micro lots

Since 0.1 standard lots = 1 mini lots = 10 micro lots, wouldn’t they produce the same amount of risk and reward?

For instance, if our target profit is 50 pips, the number of pips the user earns will be:

standard account: (50 pips per standard-lot)(0.1 standard-lots)(\$10/pip) = \$50
mini account: (50 pips per mini-lot)(1 mini-lots)(\$1/pip) = \$50
micro account: (50 pips per micro-lot)(10 micro-lots)(\$0.1/pip) = \$50

As you can see, they all produce the same result (\$50) :eek: What are the probems:confused:

Thanks

Lalatony,

Everything you said above is correct, it’s all the same. The reason for opening different account types is in the minimum and maximum orders allowed.

Some brokers won’t let you open a fraction of a lot, and if you had a \$100 account you would not want to be stuck trading a standard lot at \$10 per pip.

Also, most brokers have a maximum lot size. 50 lots is a common max a lot of brokers have, and if you had a \$100,000 account you wouldn’t want to be limited a \$5 (50 micro lots) max per pip.

To make the calculations you discuss, do we use the BID or the ASK price?

Generally all forex calculations are done on the bid price, but it really doesn’t matter. The small difference between the two prices would only make a penny’s worth of difference in the calculation.