Lots, Leverage, Margin and Notional Trading Values...How interesting

Beginner Questions
1

Here is my question on Lots, Leverage and Margin.

Suppose my account balance/available trading margin is $10,000.00
The Forex market I am going to trade is GBP/USD

I want to risk a maximum of 5% of my account balance on any single trade.
This would be equal to 5% of $10,000.00 = $500.00

I decide to set my Stop Loss at 26pt’s, this chosen 26pt’s has already taken the spread into consideration, and so we won’t worry about that for now. I obviously have to spread the $500 (5% of account balance) over the 26pt’s to equal about $19.23 per point.

Here is a quick break-down to make the following question as simple as possible, or at least that is my aim.

[B]$10,000 = Account Balance
$500 = 5% Risk
$500 = 26pt’s range of total risk
$19.23 = 1pt
$19.23 = 1.923 Lots[/B]

So, 1.923 Lots has a notional value of (1.923 x 100,000 of base currency)

This is the question:

  1. I assume the base currency when trading GBP/USD is GBP, if this is true is the above notional value £192,300 or is it $192,300? This confuses me as my broker’s website states margin requirements with respect to the notional value of trades which it shows in $’s and not £’s? I would ssume as the base currency is GBP (£) and not USD ($) then the answer would be £192,300?

  2. If a broker is offering leverage of say 100:1 and Margin requirement of say 2%, how would this be calculated for the above 5% trade example?

  3. Also why do Forex accounts state your balance in $’s and not £’s when dealing with GBP/USD?

In short, my new broker uses notional values when placing trades. I have come from the simple theory of spread betting where you don’t have to worry about Lots, Leverage or even Margin.

Any help would be much appreciated, but please keep you answers to yourself if you are not 100% certain on the process following Lots, Leverage, Margin and Notional Trading Values.

JB

2

The size of your position is expressed as a number of units of the base currency. In your case that’s GBP, so a standard lot is £100,000. As I write this, GBP/USD is about 1.6120, so the notional value of a standard lot is about $161,200.

  1. If a broker is offering leverage of say 100:1 and Margin requirement of say 2%, how would this be calculated for the above 5% trade example?

If you’re doing 1.923 lots, that’s 192,300GBP. Converting at the same GBP/USD rate provides a $309,987.60 notional value. Your margin requirement for that position at 2% would be $6199.75.

  1. Also why do Forex accounts state your balance in $’s and not £’s when dealing with GBP/USD?

You account shows your position size in terms of the base currency you’re trading, but all your account values are show in your account currency.

3

Rhodytrader,

Thanks, thats cleared that one up. I guess my main area for confusion was with notional values. However as you said, you have to know the actual value of GBPUSD to calculate the notional equivilant of $'s. Calculating the notional value of GBPUSD in £’s is simple as its a multiplier of 100,000 hence the base currency.

It seems to get more complicated with my broker when the notional value of $5,000,000 however I’m a little off that mark yet :slight_smile: