ok, i’m fairly new at this, traded forex demo for almost 10 months now and doing ok (i’m not losing)
i’m interested in trying a real money account. because my capital is very limited, i can come up with 250$ tops.
my question is, if i open a micro account, where min trade is 1000$, what will be the MINIMUM leverage i will have to put in order to trade ? (4:1 ?)
secondly, how much money change will every pip do ? (40 cents per pip in micro account ?)
i’m not trying to make big bucks here, just need to understand how is it to trade when real money involved.
Leverage is not something that you “put in”. Leverage is the ratio between the actual size of the position you trade and the actual size of your account.
Example: you have a $250 account, and you trade $1,000 worth of currency with this account. You are trading a position which is 4 times the size of your account. You are using 4:1 actual leverage.
Suppose your broker allows you UP TO 100:1 leverage. In that case, you could trade a position UP TO $25,000 in size (ignoring the cost of the spread, and the risk of a slight price move against you).
This illustrates the two different meanings of the word “leverage”: in the first case, we were talking about the actual leverage you use; in the second case, we were referring to the MOST your broker will ALLOW you to use.
In a micro account, 1 pip is worth 10¢ per micro-lot ($1,000) traded.
In a mini account, 1 pip is worth $1 per mini-lot ($10,000) traded.
In a standard account, 1 pip is worth $10 per standard lot ($100,000) traded.
so let see if i got this straight, my actual leverage in a micro account where i deposit 250$ will be 4:1, so when i trade an account where every pips worth 10c, each movement of 1 pips (in our little example) will change my balance at 40c “steps” ?
That would depend on the size of the trade that you opened. If your trade is for 1 mini-lot then your equity would move in 10c increments if you opened a trade for 4 mini-lots then it would move at 40c increments.
and lastly, in our described little scenario, how many pips would i be able to “lose” for that 250$ deposit before my entire account is wiped to zero ?
will it be 10c X 250$ = 2,500 pips (that is if i trade only one micro lot at a time)
Here is a lesson from my own successes and failures to help with setting trade sizes. I use a 5% rule to keep myself in check, my balance is 5% of my trade size. Example, if I have $1000 balance then I will use a max of 0.2 standard lot in leverage or $20,000. I didn’t see that anywhere, I just use it fight the temptation to “go big” and use too much leverage. I like having a very large buffer between my balance and a margin call.
$250 is 5% of $5000 so the most I would trade with is 0.5 lots (or 5 micro-lots). That is how I do it but you must decide on your own what works best for you through demo trading and learning about your style.
Clarification: These pip values are valid when the USD is the quote currency (second one in the pair, such as EUR/USD). They are not necessarily valid when the USD is the base currency (e.g. USD/JPY) or when talking about crosses.
Also, for most brokers a micro lot is 1000 units, not necessarily $1000. For example, a micro lot of EUR/USD is 1000 EUR. At an exchange rate of 1.30 that would be $1300.
mmm…i’m still missing something. as mentioned, the minimum micro lot is 1000$, but i don’t have 1000$, only 250$, so from what i understand, my broker loans me the completion (750$) and that’s why my leverage, actual one, is 4:1 ? so how much will I need to lose for a margin call ?
i thought i cannot lose more than i deposit and 750$ of my micro lot, is not mine…
Ok, I don’t mind answering questions but I think that new people should do 2 things before posting questions that are usually answered by doing these two things.
Graduate the entire BabyPips School
Demo trade for a little bit (30 days at least) to understand how things work. Doing this while in the school is useful as both work well together.
I am not trying to be rude or brush you off but it is much better to learn by actually trading and you will understand a lot more than you do right now by doing those 2 things.
If there are things that you still have questions about after all that then please ask away.
i don’t see it as a rude thing. i should read the entire thing probably. for the demo, well, i’m trading 8 months now and manage to make money, but not real money…
thx anyway.
I agree with [B]romad[/B]'s suggestion that you do some serious study of the Babypips School, and the other excellent resources available on the internet.
But, I’ll take one more shot at trying to explain this.
First of all, in the example we have been discussing, your broker does not lend you $750.
Second, you would have to sustain a loss of 2,397 pips in order to receive a margin call.
Third, under normal circumstances, you cannot lose more than your entire account. Actually, under normal circumstances, after a total wipe-out, you will still be left with the margin from your last trade. More about that below.
[B]
Let’s walk through this, step by step:[/B]
* You open a micro-account with $250.
* Let's say that your broker's maximum allowable leverage = 100:1. This means that margin = 1% of position size. If your position size is one micro-lot, the required margin will be $10 (1% of $1,000).
* Let's say you place an order to "buy" 1 micro-lot of USD/CAD ($1,000 worth of currency --- 4 times the equity in your account). Your broker is NOT lending you money (this will be explained below).
* Upon receipt of your order, your broker's server sets aside $10 of your account equity for margin, and charges your account a spread. Let's say that your broker's spread on the USD/CAD is 3 pips, and the current pip-value is 10¢ per pip per micro-lot. That means that your broker charges your account 30¢ for the spread.
* Your account equity is now $239.70 (that is, $250 - $10 margin - $0.30 spread). This is the total amount that you can lose on this trade.
* Let's say that, for whatever reason, you do not place a protective stop on your trade.
* Now, suppose that some catastrophe in the U.S. causes the USD/CAD price to plunge 2,400 pips ---and you have no stop-loss in place.
* Before the price finds a bottom (2,400 pips below your buy price), your losses will have consumed all of your $239.70 account equity, and your broker will automatically close your position. This is referred to as a "margin call".
* After this margin-call, your $10 margin will be released back to you, and this will be the only money remaining in your account.
* You have just lost $240 of your account ($0.30 for the spread + $239.70 in losses).
* You did not lose $1,000 (the notional value of your position). And you don't owe your broker any money. Under normal circumstances, you cannot lose more than the amount you have in your account
In step #3 above, you will notice quotation marks around the word “buy”. Here’s the reason. Although we use the terms “buy” and “sell” when talking about LONG and SHORT positions in the forex market, you didn’t really “buy” anything in the example above. Rather, you entered into a transaction which can be thought of as a very short-term (2-day) futures contract.
When you “bought” the USD/CAD, you were actually agreeing to take delivery of 1000 U.S. dollars, and to pay for them using Canadian dollars, 2 days in the future. That 2-day settlement date never arrives, because each day it is rolled forward by one day. Consequently, you could keep your position open indefinitely, if you so choose.
When you entered your LONG USD/CAD position (i.e., when you “bought” the USD/CAD), you were not required to pay the Canadian-dollar-equivalent of the 1,000 USD that you have “bought”. Instead, you were required to post margin, which you can think of as a good-faith deposit. The margin amount ($10 in the example above) is not actually removed from your account, but it is designated as “used margin”, and it is unavailable to you to cover any losses which you might incur.
The purpose of margin is not to protect you. The purpose of margin is to protect your broker, so that your account balance never becomes negative, and you never end up owing your broker money.
thank you for your patience, you’re the first person which make me understand at last this thing. i come from stock markets trades and this is so much different…
i’ll try to get some more capital so my deposit will be higher than 250$ (as i read i should do) and see how i’m doing.
