To facilitate trading on the spot-forex market, the concept of a lot was introduced – this is the size of the deal. The standard lot is 100,000 units. However, not all “afford” to conclude such a big deal, so it was decided to bring into circulation mini-, micro and nano-lots. This course of things allows even small traders to work in the forex market, making a profit.
Types of lots in the forex market
- Standard – 100,000 units
- At least 10,000 units
- Micro – 1,000 units
- Nano – 100 items
Quotes in the forex market are arranged so that the change in the value of the currency relative to the other is measured in “points” – this is a very small percentage of the value of the currency. And to get a solid profit from such a small indicator, a trader must trade large volumes.
To show this all in practice, we give a real example. Suppose, you want to conclude a deal with a standard lot of 100,000 units. Now we calculate how different rates affect the value of the item and the profit in general.
- USD / JPY at the exchange rate of 119.60: (0.01 / 119.60) x 100 000 = 8.36 US dollars per pip
- USD / CHF at the exchange rate of 1.4635: (0.0001 / 1.4635) × 100 000 = 6.83 US dollars per pip
Note that in the above options, the US dollar was in the first place. Now consider the option when the US currency is quoted, that is – it is in second place.
- EUR / USD at the rate of 1,1980: (0,0001 / 1,1980) X 100,000 = US $ 8.35 per pip
- GBP / USD at the rate of 1.8120: (0.0001 / 1.8120) x 100 000 = 5.52 dollars per pip
As you can see, the cost of a pips depends largely on what currency you are currently trading.
What is leverage
If you are an active trading trader, you are probably interested in the practice of other traders. And we are almost certain that once you are faced with a situation where a small trader with a small starting deposit opens large deals with standard lots. How does this happen? He uses his leverage.
Most brokers give their customers the opportunity to use leverage. Then the broker takes from you a certain guarantee in the form of “margin”, and provides an opportunity to use a certain amount of virtual money and conclude big deals on the basis of these. It’s clear, then you will return this money to the broker, and he to the bank, but the profit that they received with their help will remain with you. The amount of money that you will be allocated is determined depending on the specific transaction. From this, he will start by determining the amount of the margin.
In general, leverage is a very profitable thing, and practically all traders, especially small ones, use this service. Therefore, starting trading with a broker, ask him about the conditions for granting a leverage.