Lot Size and Leverage
When you’re trading forex online, it’s not like you can load your car up with cash, drive to a designated meeting place and trade your Dollars for Yen. You are of course doing business via online contracts. Contracts that have standard sizes called lots in place to make online forex trading standardised around the world.
The following is a list of common lot sizes and the corresponding number of currency units that you are in fact buying or selling.
- 1 STANDARD lot represents 100,000 units of currency.
- 1 MINI lot represents 10,000 units of currency.
- 1 MICRO lot represents 1000 units of currency.
Both the Standard STP and RAW ECN forex trading accounts at Vantage FX are by default set to be trading using standard lots. At first glance, this may seem like it is only suitable for big traders but don’t worry because the Vantage FX MT4 platform allows you to trade down to 0.01 of a standard lot, effectively giving you the opportunity to trade Micro lots if you please. By playing with fractions of a standard lot, traders of all levels are able to trade on a standard account.
The next question then becomes; do I need $100,000 in my forex trading account just to trade 1 single standard lot?! Don’t stress, the answer is no. This is where forex traders utilize what is known as leverage.
When you trade forex using leverage, you actually are able to control more money than the balance of your own trading account. The term comes about because with the broker’s help, you are ‘leveraging’ the money that you have. Using leverage allows you to increase your profits because you are able to trade bigger size than a non-leveraged investment would allow.
At Vantage FX, a standard account has leverage of 100:1. This means that for every $1,000 in your trading account, you are actually able to control $100,000 of currency. Think of leverage as your broker lending you the $100,000 so you can trade standard lot sizes. Your $1,000 account is what’s known as margin, and can be seen as a good faith deposit while you are using their money to trade standard lot sizes.
For example, let’s say your Standard STP trading account at Vantage FX has a balance of $5,000 and the leverage you are using is 100:1. If you wanted to go long 1 standard lot of EUR/USD then Vantage FX would set aside $1,000 as margin and would allow you to take the position.
This is an extreme example and also highlights the risks that leveraged forex trading exposes you to. If the ‘Margin Level’ in your MT4 Terminal drops to 50%, then your position will be automatically closed and you will have experienced what is called a margin call.
With leveraged forex trading, risk management becomes key. Use a forex demo account to help understand how to manage your risk while trading using leverage.