EXTREMELY Confused about Lot Sizes, Leverage, Everything!

Beginner Questions
1

Guys I don’t know whether this is a major brain fart or if I’m just overthinking this but I am seriously confused about lot sizes and everything related to this. I’ve completed School of Pips, I’ve made notes, I’ve read books and for whatever reason cannot wrap my head around how we can trade more lots than we own without using margin. I feel like this is the only piece of info that’s holding me back from understanding forex properly.

In Baby Pips school Senior Year it says: “…Most traders trade one standard lot for every $50,000 in their account. If they traded a mini account, this means they trade one mini lot for every $5,000 in their account”.

OK, if that’s what they do, how does one trade a standard lot (which has 100k units) if they only have $50k? How is that even possible? If the answer is through leverage, does that mean that in MT4 when they trade a standard lot with $50k they put in “2.0” for the volume to essentially double the value of their pip? I did this once as a test in demo (don’t worry, I’m not trading live!) and my parameters were the following: having $50k USD account balance, and the value of each pip being $20 instead of $10. Needless to say I had my eyes peeled to the screen given that the pip value doubled. Since the value of a pip in a standard account is $10, I was very confused why it would be this same value in my demo account that only has $50k. Does this mean that the account is leveraged? If so, by how much? According to my printouts it says I have 1:50 leverage. What if I don’t want to be leveraged at all?

So my questions are:

-How can you trade 5 mini lots for example if you only have a balance of 1 mini lot?
-If leverage is the answer to the above question, how do you change this setting, is it through ‘volume’ on MT4?
-Does ‘volume’ on MT4 mean the same thing as lots?
-Does increasing ‘volume’ on an order entry mean that 3.0 volume = $30?
-What about decreasing volume, that would make the pips worth less, how’s that work?
-What do I put in ‘volume’ if I don’t want to be leveraged at all?
-How can you trade more lots than you own without margin?
-What happens if you use leverage (ie: 2 lots vs. 1) and you lose double the money, does that leveraged amount actually get deducted from your account balance or just the original amount? OR do you just get a margin call and are kicked out of your trade before you owe more money than you own?
-Is it ever possible to lose more money than your account balance?

I tried to organize my questions as best as I could and hope I didn’t confuse in the midst of my own confusion, thank you for the help!!!

2

Yes, the answer is leverage. Actual leverage used in this case is 2:1.

Actual leverage = position size / account balance = 100,000 / 50,000 = 2.

Expressed as a ratio — 100K:50K = 2:1 actual leverage used.

2.0 means 2 standard lots. In a 2-lot position, the value of each pip will be twice that of a 1-lot position. That is, the value of each pip will be $20, instead of $10 (assuming you are trading a pair of the form XXX/USD).

Pip value is determined by position size, and the pair you are trading — [I]not[/I] by your account balance, [I]not[/I] by the maximum leverage allowed by your broker, and [I]not[/I] by the actual leverage you are using.

If the quote currency in the pair you are trading, AND your account currency are both USD — for example, trading EUR/USD in a USD-denominated account — then pip values are as follows:

• trading one standard lot (100,000 units of currency) – 1 pip is worth $10

• trading one mini-lot (10,000 units) – 1 pip is worth $1

• trading one micro-lot (1,000 units) – 1 pip is worth $0.10

• trading one nano-lot (100 units) – 1 pip is worth $0.01

• trading individual units (example: Oanda account) – 1 pip is worth $0.0001 (that is, 1/100 of a cent)

Your broker offers you leverage (up to a specific limit, say 50:1), but you don’t have to use that leverage, or any leverage at all.

If you want to trade without leverage, set your position size EQUAL TO or LESS THAN your account balance. If you have a small account balance, this pretty much requires that you have an account that lets you trade in micro-lots, or smaller.

If you have only $500 in your account, and you want to trade without leverage, then you must have either a nano-account (in which you can trade in increments of 100 units), or a unit-account (in which you can trade any number of individual units).

Balances are not stated in terms of “mini lots”. Balances are stated in terms of dollars (or other account currency).

You can trade 5 mini-lots in an account with a balance of $10,000 by using 5:1 actual leverage.

Volume refers to position size, measured in standard lots — it does not refer to leverage. When you specify the size of your trade (the volume), you are [I]determining[/I] the actual leverage you will be using in the trade, but you are not “changing a leverage setting” within the trading platform.

Yes. Volume=1.0 means 1 standard lot. Volume=1.5 means 1.5 standard lots. Etc.

Volume=0.1 means 1/10 of a standard lot (i.e., 1 mini-lot).

Volume=3.0 means 3 standard lots, which will have a pip-value of $30 per pip IF you are trading a pair of the form XXX/USD.

As noted above, Volume=0.1 means 0.1 standard lot, which will have a pip-value of $1 per pip (for XXX/USD pairs).

If your account balance is $50K, then Volume=0.5 (or smaller) will specify a position size which is equal to (or smaller than) your balance. That is, you will not be using leverage.

You don’t own lots. You own the dollars (or other account currency) in your trading account.

How can you trade a position size that is larger than your account balance ? — by using leverage.

MARGIN is required in every trade, regardless of the leverage you are using (or not using). Margin is determined by position size, not by account balance or leverage used.

However, margin [B]is[/B] related to the MAXIMUM ALLOWABLE LEVERAGE offered by your broker. Maximum allowable leverage is one of the metrics of your particular account. The approximate relationship is:

Required margin = 1 / maximum allowable leverage

So, if your account offers you maximum allowable leverage of 50:1, then the required margin will be 2%, [I]or slightly more,[/I] of the notional value of your trade (your position size). Check with your broker to find out exactly what margin amounts apply to various pairs, and various position sizes. In the U.S., 50:1 leverage is the [I]maximum[/I] allowable under law — and, therefore, 2% margin is the [I]minimum[/I] allowable under law.

If you trade one mini-lot, in which each pip is worth $1, and you lose 50 pips, then you have lost $50 — regardless of your account balance, and regardless of how much actual leverage you were using in this trade.

If you double the size of this trade, and trade 2 mini-lots, then each pip is worth $2, and if you lose 50 pips, then you have lost $100 — regardless of how much you have in your account, or how much actual leverage you were using.

When you place a trade, MARGIN is withheld from your account (not permanently, just for the duration of your trade). This margin is not available for covering your losses. If the total of the required margin PLUS the loss in your position depletes your account balance to [I]near zero,[/I] you will get a MARGIN CALL.

Different brokers have different ways of handling margin calls. Check with your broker for details, and make sure that you understand exactly what will happen if you (1) trade too large, and/or (2) let your losses spiral out of control, resulting in the near-depletion your account balance.

In general, there is no excuse for getting hit with a margin call.

It’s possible, but not common. The whole idea of MARGIN and MARGIN CALLS is to prevent your account balance from actually reaching zero.

You’re welcome. And welcome to this forum.

.

1 Like
3

Hi,
A quick question re leverage if you don’t mind please?

I currently have a demo account with a £1000 balance as that’s the amount I will be trading with for real when I start.
My demo account has a leverage ‘up to’ 10%

Say I wanted to buy GPB/USD @ 1.5282 with a risk per trade of 1% (£10) and a stop loss of 9 pips.
This would mean I would need to buy 16980 units of currency (0.170 lots)

Using the 10% margin I wouldn’t be able to place the order as I’d need £1690 worth of margin.
Using a 50% leverage however I’d be fine, but I’m not comfortable using that high a leverage amount.

Does this mean realistically that £1000 is far too low a bankroll to have using a 10:1 leverage unless I’m prepared to micro trade with pence at risk rather than pounds?

Cheers,
Simon

4

A “50/1 leverage” (you meant to say). :wink:

Yes.

You could manage with 25/1 leverage, but I think it’s better to get used to using 50/1 on your Oanda account, Simon, really.

The only reason you have this issue is that Oanda’s algorithm uses a figure of their own, far bigger than your 9-pip SL, to work out the maximum permitted position-sizing, because they’re covering themselves for a situation in which customers trade (for example) during NFP announcements and similar things, and sudden, “unexpected”, fast-moving markets can mean that they wouldn’t be able to honour your stop-loss. This almost never happens and isn’t relevant to the system you’re trading anyway (just don’t trade during major economic announcements, which you wouldn’t do anyway).

Another alternative would be for you to switch to a broker who offers [I]guaranteed[/I] stop-losses (I wouldn’t, myself, and it wouldn’t be suitable for the system you’re currently trading anyway, because the spread would be too wide, that way).

5

Hi Lexys,
Thanks for the advice - I have now acted on it and changed my Leverage to 50:1 (yep, not 50% lol - that’s my fat fingers!)
on my Oanda demo accounts.

I’ll let you know a few more trades in how the system is going :slight_smile:
Cheers,
Simon