Quick question concerning lots

Hey traders,

I just have a few quick questions. I must be overthinking it, but all of the resources online don’t explain it so that I can understand it.

Q: If I enter a trade with $1000 on a 100:1 leverage, does that mean my lot size is $100,000?

Q: If a broker offers a micro lot at $1000, does that mean I have to use $100 at a 10:1 leverage or $10 with a 100:1 ratio?

How does this all work? I can’t seem to grasp it in my head.

Thanks all.

I assume you mean that your broker allows you to use up to 100:1 leverage. That limit (which he places on your position size) does not define your position size. In fact, you would be very foolish to actually use 100:1 leverage.

So, you should always distinguish between two “types” of leverage, and make sure that it’s clear which type of leverage is being discussed.

Let’s use an example.

You have $1,000 in your forex account. [B]Your broker allows you to use up to 100:1 leverage.[/B] But, you’re a prudent trader, and [B]you limit yourself to much smaller levels of leverage. [/B]Let’s say you want to trade EUR/USD with a 40-pip stop-loss, and you want to limit your risk (your exposure to potential loss) to no more than 2% of your account.

Two percent of your account would be $20, and you want your worst-case outcome (being stopped out of your trade) to cost you only $20. That means that a 40-pip move against you will cost you $20. So, how large should your position be?

If 40 pips x your position size = $20, then 1 pip x your position size = $0.50.

In this particular trade, we know that for a 1-micro-lot position (= 0.01 standard lot = 1,000 units of currency), 1 pip is worth $0.10.

So, for a 5-micro-lot position (= 0.05 standard lot = 5,000 units of currency), 1 pip would be worth $0.50, which is the figure you are looking for.

Therefore, you want to trade 5 micro-lots of EUR/USD with a 40-pip stop-loss, to ensure that you can’t lose more than $20 if your trade goes bad.

Assuming you did this trade, what actual leverage did you use?

We need the current price of EUR/USD — let’s say it’s 1.3775.

[B]Actual leverage used = the notional value of your position ÷ your account balance[/B]

= €5,000 x current price of EUR/USD ÷ $1,000

= €5,000 x 1.3775 ÷ $1,000

= 6.8875 which means that [B]you are using 6.89:1 actual leverage[/B]

The actual leverage you are using is [B]nowhere near[/B] the 100:1 maximum allowable leverage which your broker advertises.

We can’t discuss leverage intelligently, without being perfectly clear which type of leverage we are talking about.

If your broker offers micro-lot trading, it means simply that you can trade in increments of 1,000 units of currency (micro-lots). You can trade one micro-lot, or two micro-lots, or any other whole number of micro-lots. You can’t trade 1½ micro-lots. The incremental size of trades has nothing to do with leverage.

In the example above, you could trade 1 micro-lot of EUR/USD using 1.38:1 actual leverage,

or you could trade 2 micro-lots of EUR/USD using 2.76:1 actual leverage,

or you could trade 5 micro-lots, as in the example, using 6.89:1 actual leverage,

or (if you have a death-wish), you could trade 72 micro-lots, using 99.18:1 leverage.

You could not trade 73 micro-lots of EUR/USD, because then your [B]actual leverage[/B] (over 100:1) would exceed your broker’s 100:1 [B]maximum allowable leverage.[/B]

I hope that cleared up your confusion.

Q: If I enter a trade with $1000 on a 100:1 leverage, does that mean my lot size is $100,000? At 1:100 you can control 100,000 units of a specific pair, not necessarily worth $100,000.

Q: If a broker offers a micro lot at $1000, does that mean I have to use $100 at a 10:1 leverage or $10 with a 100:1 ratio?
1000/100= 10, you only require $10 as your margin