You’re welcome, @jones6.
You are partially correct, but partially incorrect.
If you deposit $20,000 in your trading account, and want to use 5:1 leverage (it is incorrect to say “5:1 margin”), then you are correct that this would equate to approximately one standard lot (100,000 units of base currency).
We say approximately, because the notional value of one standard lot depends on the base currency of the pair you are trading:
-
For example, if you trade USD/JPY, USD/CHF or USD/CAD, then the base currency is the US dollar, and one standard lot would be exactly 100,000 USD. Therefore your effective leverage would be exactly 5:1 since you would be controlling $100,000 in the market with $20,000 in your account.
-
By contrast, if you trade EUR/USD or GBP/USD, then the base currency would be either the euro or the British pound respectively, and one standard lot would be worth 100,000 EUR or 100,000 GBP. That means your effective leverage would be slightly more than 5:1 since both euros and pounds are worth more than dollars at current EUR/USD and GBP/USD exchange rates.
First, it’s important to note the following:
- If you are risking $10 per pip, then a 100 pip loss would equal $1000, not $500. (100 pips × $10/pip = $1000)
- If you want to risk only $500 at $10 per pip, then you would need to limit your risk to 50 pips. ($500 ÷ $10/pip = 50 pips)
Second, the value of a pip depends on the trade size and the counter currency of the pair your are trading:
-
For example, when trading one standard lot of EUR/USD, GBP/USD or AUD/USD, where the counter currency is the US dollar, the value of a pip is exactly $10.
-
By contrast, if you trade one standard lot of USD/CHF or USD/CAD, then the counter currency would be either the Swiss franc or the Canadian dollar respectively, and one pip would be worth 10 CHF or 10 CAD. (Currency pairs ending in JPY are a special case in that the value of one pip is 1000 yen, when trading one standard lot.)
For more details, you may find these earlier discussion helpful: