This guide will make it easy to understand how much money you can make with different lot sizes and how to use your leverage account effectively when trading in the forex market.
What is a Pip?
First, let’s learn about something called a pip. Imagine you want to buy something in a different country, like euros with US dollars. The price changes a tiny bit all the time. A pip is just a tiny change in that price.
Let’s look at the price of EUR/USD (Euros and US Dollars). Maybe the price is 1.17835. This means that for 1 Euro, you get 1.17835 US Dollars.
A pip is the fourth number after the dot. So, in 1.17835, the ‘3’ is what we look at.
- If the price goes up to 1.17845, that means it went up one pip.
- If you want to make 10 pips profit, and you are buying, you want the price to go from 1.17835 to 1.17935. That’s a 10-pip jump!
What are Lot Sizes?
When you trade in forex, you pick how big your trade is. This is called a lot size. There are three main lot sizes to know:
- 0.01 (Micro Lot): This is the smallest size. Think of it like buying a very small amount of something.
- 0.10 (Mini Lot): This is bigger than a micro lot. It’s like buying a medium amount.
- 1.00 (Standard Lot): This is the biggest size. It’s like buying a large amount.
How Much Money Do You Make Per Pip with Different Lot Sizes?
Let’s say you are using US Dollars as your main money. Here’s how much you can make for each pip with different lot sizes:
- Micro Lot (0.01): You make 10 cents for every pip.
- Example: If you make 10 pips, you earn $1.00 (10 cents x 10 pips = $1.00).
- Mini Lot (0.10): This is 10 times bigger than a micro lot. You make $1.00 for every pip.
- Example: If you make 10 pips, you earn $10.00 ($1.00 x 10 pips = $10.00).
- Standard Lot (1.00): This is 10 times bigger than a mini lot. You make $10.00 for every pip.
- Example: If you make 10 pips, you earn $100.00 ($10.00 x 10 pips = $100.00).
So, if you buy EUR/USD at 1.17835 and the price goes up one pip to 1.17845, and you used a standard lot, you would make $10!
What Does Each Lot Size Mean in Real Money?
This is where leverage becomes important!
- A Standard Lot (1.00) means you are trading 100,000 units of the money. So, for EUR/USD, a standard lot is like trading 100,000 Euros. To really buy that much, you would need about $117,835 in your account! Most people don’t have that much money just sitting in their trading account.
- A Mini Lot (0.10) means you are trading 10,000 units.
- A Micro Lot (0.01) means you are trading 1,000 units.
What is Leverage Trading?
Since most people don’t have $100,000 in their trading account, we use something called leverage. Leverage is like getting a bigger “oomph” for your money.
Imagine you have $100 in your trading account. With leverage, your broker (the company you trade with) lets you trade with much more money than you have.
- If you have 1 to 30 leverage (common in places like America), your $100 becomes like having $3,000 in buying power ($100 x 30 = $3,000).
- If you have 1 to 100 leverage, your $100 becomes like having $10,000 in buying power ($100 x 100 = $10,000)!
This means that with a small amount of your own money, you can make much bigger trades. This helps you earn more money from your trades because you are trading with a larger number of units.
Important: While leverage helps you make more money with less of your own cash, it can also make you lose money faster if your trade goes the wrong way. That’s why smart risk management is super important!
I hope this helps you understand leverage trading and lot sizes better!
