I read the school information, but I’m still a little confused. Maybe someone can help explain the lots.
For example, I see others making trades with .1 lots or .5 (half) a ‘lot’. But!.. My guess is thats because they want to get a lower risk and lower pip value. Couldn’t you do the same thing buying 1 lot but going with a lower leverage?
I’m a bit confused, cause I see lots and leverage basically the same thing just a different representation.
1 Lot of 10k at leverage 50:1
is the same as…
.1 Lot of 10k at leverage 500:1
is the same as…
.1 lot of 100k at leverage 50:1
Is this correct or am I missing something? If this is correct, why the differences?
Thanks
Jeff.
Go to Forum -> Newbie Island -> look for the thread posted “[B]Leverage Question… HELP![/B]” it is discussed in detail.
pipjunky,
thanks, I read through that post. However, I do understand how leverage works. My question is more about how leverage & lots work together, and if my example above is correct?
The only difference is the amount of money you need, for the 50:1 scenerio, you would need more money in your account and in turn, more pips to wipe that out (less risk)… in the 100:1 scenerio, obviously less money (more risk).
But in the case where their both 50:1 and only the lot size and lot quantity are different, are they the same?
I say same because they all add up to: (500,000)
.1100k50 = 500,000
.110k500 = 500,000
110k50 = 500,000
Thanks!
Jeff.
Let’s start of first by saying that a ‘lot’ is a 100,000 position, just to make sure we’re all on the same page. There are mini lots (10,000) and micro lots (1000) as well. So, a .5 lot would be the same as 5 mini lots or 50 micro lots.
The next thing is that leverage determines how many lots you can trade given your account size. You can trade more at 100:1 than you can at 50:1. For example, for an account of $1000, 50:1 leverage allows for a $50,000 trade size, while a 100:1 would allow for a $100,000 position.
The margin requirement for a position is a function of the allowable leverage on the account. A $100k trade at 100:1 leverage would require $1000 margin, while at 200:1 it would only require $500.
Do not equate margin requirements to risk, though. Risk is a function of the size of a position relative to the size of the trading account and the move the market makes. It doesn’t matter at all what your allowable leverage is if you are trading a full lot in EUR/USD and the market moves 100 pips. That move is worth $1000 regardless of whether you are using 10:1 leverage or 400:1 leverage.
The initial question asked was “Couldn’t you do the same thing buying 1 lot but going with a lower leverage?”
Hopefully you see why the answer to that question is “no”. The size of the position is what matters. Leverage just determines how large a position you can take.