Leverage, money and pips (help needed)

Hello, im new here and have few questions. Lets say i open account with 1000£ on the leverage 1:100 so i have 100.000£ to play with. My question: Whats worth to me 1pip with 1000£ is it 10£ or 1pound?
Thank You.

Considering the fact that you are new, and don’t have a good grasp of the concepts of leverage, pip-values, etc., I hope that you are NOT actually trading real money, yet. I hope that you’re asking about a hypothetical £1,000 trading account.

If you are really starting out with no knowledge, no trading skill, and £1,000 of real money on the line, then I will have a recommendation for you in a moment.

For now, let’s talk about your hypothetical £1,000 account, and let’s take leverage, and margin, and pip-values, one step at a time.

You have £1,000 of actual money. You deposit that into a forex trading account. Now your account shows a BALANCE of £1,000 (actual money, on deposit, ready for you to use).

Ready to use how? Ready to use as MARGIN. Think of MARGIN as a down payment, or as a security deposit.

A down payment would only be used if you were “buying” something that costs more than the money you have available to pay for it. Think of buying a house with a down payment and a mortgage. Or a car, with a down payment and a car loan.

In forex trading, you use MARGIN (your down payment) to enter LONG or SHORT positions (loosely called “buying” and “selling”) which are larger than your BALANCE (your actual money).

How much larger? Up to 100 times your BALANCE. That’s what your broker’s advertised (maximum) 100:1 leverage means. And it also means that for any position that you enter, you will be required to post 1% of your BALANCE to MARGIN. (Actually, your trading platform does all that, and reports the numbers to you, automatically. But, you should THINK of it in terms of actually setting aside 1% of the notional amount of your trade as MARGIN.)

Burn this into your mind: There are two kinds of leverage, and you must never confuse the two. There is the MAXIMUM ALLOWABLE leverage offered to you by your broker, and there is the ACTUAL LEVERAGE that you CHOOSE to use. These are two very different things. You should NEVER even consider using leverage in the range of 100:1.

Let’s make sure that you fully understand this concept of leverage and margin, as they pertain to position size.

If you enter a £2,000 position with your £1,000 BALANCE, you are using 2:1 leverage. This position requires 2% of your BALANCE to be “escrowed” as MARGIN, leaving 98% of your BALANCE available to cover spreads, losses, margin on additional positions, etc.

If you enter a £10,000 position with your £1,000 BALANCE, you are using 10:1 leverage. This position requires 10% of your BALANCE committed to MARGIN, with 90% uncommitted.

If you enter a £50,000 position with your £1,000 BALANCE, you are using 50:1 leverage. This position requires 50% of your BALANCE for MARGIN, with 50% uncommitted.

And so forth, right up to the 100:1 maximum allowable leverage offered to you by your broker. You could NOT actually open a position requiring 100% of your BALANCE as MARGIN, because the SPREAD (which is like a loss, to you) would trigger an immediate MARGIN CALL, as soon as you opened the position.

So, what is a prudent amount of leverage to use?

If you are learning to trade by practicing on a DEMO account, then enter positions which are the smallest allowable by your demo account. If your demo account is a MINI account, then the smallest position you can enter is 10,000 units of base currency. Whatever actual leverage that works out to, is fine. It won’t be much leverage. And you will notice that your gains and losses are a tiny fraction of the size of your demo account. And, that’s actually the point: you are practicing and learning; your goal is not to double the funny-money balance in your demo account; your goal is to learn to trade profitably.

If you are starting from scratch to learn forex trading with a LIVE ACCOUNT, then there is only one way to do this successfully: put your real money into a NANO account, and trade in increments of 1 nano-lot. A nano-lot is 100 units of base currency. Trading such tiny lots means that your gains and losses will be trivial amounts. And that’s the point. Your initial goal is not to make a ton of money (fat chance of that happening, anyway!). Your initial goal is to learn how to trade, WITHOUT losing all (or a major chunk) of your £1,000.

So, what about pip-values?

Pip-values have NOTHING to do with the 100:1 maximum allowable leverage we’re using in this example. Rather, pip-values are determined by two things: the particular pair that you trade, and the size of your position.

In your £-denominated account, most currency pairs will have floating pip-values, meaning that they vary as exchange rates in the market vary. There is one pair, the EUR/GBP, which has a fixed pip-value in a £-denominated account. Let’s use that pair, for simplicity.

The EUR/GBP has a fixed pip-value of £10 per pip per standard lot (100,000 units of base currency), £1 per pip per mini-lot (10,000 units of base currency), £0.10 per pip per micro-lot (1,000 units of base currency), and £0.01 per pip per nano-lot (100 units of base currency).

So, if you trade 1 mini-lot at a time in a DEMO ACCOUNT, as recommended, then each pip is worth £1 in “funny-money”.

If you trade 1 nano-lot at a time in a LIVE ACCOUNT, as recommended, then each pip is worth £0.01 in REAL MONEY.

If you trade pairs other than the EUR/GBP, then the actual pip-values will differ from the above, and the actual pip-values will fluctuate over time as the exchange rate between the cross-currency and your account currency changes. Your trading platform should tell you the value of 1 pip for each currency pair available to you, based on the minimum lot-size allowed by your account.

There’s a lot to learn here. Make sure you completely understand all of the above.

Losing real money is no fun. If you’re trading real money while starting out from scratch, make sure that the losses — which you are inevitably going to take — are tiny.

Margin calls are no fun, as well — and there is no excuse for ever facing a margin-call. A margin-call is proof of poor money management.

Great reply as always!

Thank You Clint for you advice, im just starting so for me to open even the practice account will take time cuz i have some reading to do first. Now maby you can suggest where can i find the list of good forex platforms that not gonna scam me ill appreciate.

You can’t be “scammed” by a practice account, because (1) it’s free to download, (2) you don’t have to agree to anything or sign anything, and (3) there is no money involved.

You could open trading platforms with 10 different brokers, just to try them out, if you wanted to.

I suggest that you open 2 practice (demo) accounts over the next few months: one MT4 account, and one account that is not MT4.

I am assuming that you are in the U.K., because you asked about £-denominated accounts. If that is correct, and you are in the U.K., then I suggest FXCM-UK as a good non-MT4 platform. For MT4, I suggest either Alpari-UK, or FXCM’s MT4 platform.

Personally, I don’t like MT4. So, if I were in your situation, I would go with the FXCM-UK Trading Station II platform (which includes MarketScope charts).

However, MT4 is the most popular forex trading platform in the world. So, you should at least give it a test-drive.

Here are links for downloading demo accounts from FXCM-UK and Alpari-UK:

Free Forex Demo Accounts | Forex Practice Accounts at FXCM

Trading Account - Open a Free Demo Account - Alpari (UK)

You haven’t said anything about the Babypips School. Since you are very new to forex, the Babypips School should be your starting point. Click the green “School” tab at the top of this page to get started.

Before opening a live trading account with real money, you should complete the School, and you should select the trading platform that suits you (MT4, or some other) and become proficient using it.

Yes i live in UK and im here 6years allready, i was working in all diferent banks but my profesion is nothing to do with banking or money. So on trading floors i have seen that like 90% of traders use Bloomberg keyboard and since i dont understand anything, what is that? can i trade forex in bloomberg? Another thing, like 80% of bankers trade futures stocks or soemthing else but i havent seen lots of good traders trade forex, why is that? And yes i have few books about forex for newbies and just started your babypips school.
Thank You!

The forex market consists of two different, but related, markets: the [B]retail forex market[/B], and the [B]institutional forex market.[/B] If you have worked for a bank, and have seen the activity on their trading floor, then you have gotten a glimpse of trading at the [B]institutional[/B] level. You may not have seen spot currency trading at your bank; but, if your bank was among the largest 10% of the world’s banks, you can be sure that spot currency trading goes on there.

Most of the participants on this forum, including many veteran forex traders, have never seen the trading floor of a major bank, first hand. We are [B]retail[/B] forex traders. We are basically at the bottom of the forex food-chain. Those big banks, with their trading floors, are at the top of the forex food-chain. They are the top 100, or so, BIG banks which make up the worldwide interbank network. Most of their forex trading is done with other big banks, with multinational corporations, with the largest hedge funds, and with government central banks and sovereign wealth funds.

A small portion of their trading is done with [B]retail forex brokers,[/B] such as FXCM, Oanda, Dukascopy, Alpari, etc. And this is where the connection between retail forex and institutional forex occurs. We, small retail forex traders, place our trades through retail forex brokers; and these retail forex brokers, in turn, get their liquidity from, and offset our trades to, those big banks in the interbank network.

So, we are trading the same worldwide currency market as the big institutional players, but they drive prices; they make the market; they call the tune. We follow along, if we’re good at this game, and make some money along the way. Someone has said that we are minnows, swimming with sharks. And that’s a pretty good description.

Thus, our little retail portion of the vast forex market is firmly connected to the much larger institutional portion of the market. And, clearly, our retail forex market could not exist without the institutional forex market.

But, we operate very differently from the institutional market.

A typical retail forex trader does not have the information resources, or communication resources, that you glimpsed on the bank trading floor. We are connected to ONE upstream source of information and liquidity: our retail forex broker (FXCM, etc.). We depend on that source (1) to offer us prices which are in line with the worldwide currency market, (2) to have the liquidity to instantly handle any and all orders submitted to them, and (3) to provide us with a trading platform which gives us near-instantaneous trade execution, together with a charting package which gives us real-time data on a large menu of currency pairs in all time frames. This trading platform and its associated charting package are downloaded to our personal computers, and the real-time data which drives them is provided to us, by our broker, via the internet.

So, there is a world of difference between the [B]equipment[/B] we use to trade, and the equipment you may have seen on a bank trading floor. And there is a world of difference between the [B]pipeline[/B] that we are able to trade into, and the multiple pipelines available to a bank trader. And there is a world of difference between the [B]information[/B] available to us, and the information available to an institutional trader.

One of your questions implied that you think your trading setup, as a small retail forex trader, might replicate or resemble the trading setups you saw at your bank. Forget that.

Here is your starting point:

[li]A decent computer with a fast internet connection.

[li]A trading platform and charting package, downloaded to your computer, from a reputable forex broker.

[li]A trading account: either a DEMO (practice) account, or a LIVE (real money) account.





[li]And more education and practice.
If forex trading is something you really want to do, then plan on being a student of this market, and this business, for the rest of your career.

Someday, if you have a real talent for trading, you might be running a major hedge fund, trading billions of dollars (or pounds) worth of currency every week. Then, you’ll probably have access to the type of information available to the bank where you work. Then, you’ll need a lot more gear than just your personal computer and internet connection.

Until then, [B]think retail[/B]. Retail forex market. Retail computer purchase. Retail internet connection. Retail broker.

Thank You Clint very much for info. You said that[U] We are retail forex traders. We are basically at the bottom of the forex food-chain.[/U] Sounded like that its imposible to make any profit in retail forex… So talented traders can basicaly make good profits from retail fx or no? Or if you wanna make a living you should work in bank ar be trader there?

Yes, talented traders can make good profits from retail FX.

Can you do it? That depends on you. It depends on whether:

(1) you have natural trading ability, or

(2) you are willing to do the hard work required to develop trading ability.

Would a career path as a bank trader be better for you? I have no idea. Do you have the knowledge and skills required to qualify for such a job? Do you have contacts at your bank who can help you prepare for such a job? Only you can evaluate whether a possible opportunity exists for you as a bank trader.

As for retail forex trading, there are no entrance requirements. Anyone can take a shot at it. Furthermore, it is free to try, and completely risk-free. So, why not download a trading platform, open a demo account, and try to put into practice what you are reading about in the Babypips School?