forex leverage

What is leverage?

In the Forex markets brokers allow traders to use leverage to put on much bigger trades than they could if they had to put the entire lump sum down. Leverage size varies, in the US the maximum leverage is 50:1, in the rest of the world the leverage can go up to 500:1 or even higher.

I recommend using a leverage of 100:1. Basically, this means that you only have to put down $1 for every $100. This allows traders with small accounts to start trading much more easily.

In stocks you would have to put down the entire amount so, if you wanted to buy $100 of Tesco shares, you would have to put down $100. This is why shares are harder to trade if you have a limited account.

As long as you are sensible and understand what is going on, leverage gives us retail traders a chance to increase our accounts.

So when we put trades on with a broker, they have a margin requirement. This is the amount you need to put in to cover the trade. This margin is like a loan to cover the trade. It gets returned to you after the trade is closed but, if your account goes below the required margin, things can go wrong. What usually happens is the broker will contact you and ask you to either put more money into the account to cover the margin or close the trade.

It has been known for brokers to simply close a trade if the account can’t cover the margin.

It’s definitely something you need to keep an eye on.

What is a pip?

forex pip value

A “PIP” stands for Point In Percentage.  A pip can also be called a “point”, it doesn’t really matter but what we use pips for is to calculate entry, stop loss, profits and losses.

The pip is the smallest value a pair can move and we need to be able to work out the amount of pips in our stop loss to enter the correct lot size.

What is a lot?

what is a forex lot

A standard lot consists of 100,000 units of the base currency. It is typically valued at 1,000 USD for accounts which are funded in US Dollars. It is has a leverage of 1:100, meaning that you have control of as much as $100,000 of the base currency. The average pip size for a standard lot is $10 per pip.

We can also have mini lots, which are contracts of 10,000 units of the base currency and so the average pip size for a mini lot is $1 per pip.

We can even have micro lots, which are contracts of 1000 units of the base currency and so the average pip size for a micro lot is $0.10 per pip.

Ways to enter the Forex.

Market Orders are orders that are executed live on the market at the current price. A market order can be used to open or close a trade at the market price. This type of order is one I don’t use because it means you have to enter the trade manually. I use entry orders. Entry Orders are orders to enter the market at a specified price. You can set them to buy or sell at a specified price, for example, the low of a bearish pin bar.

It means we can set our orders and step away from the markets and let it do its thing.

The difference between the BID and ASK price

When we want to enter the Forex market our brokers will offer us two different prices, the Bid price which is the buy price and the Ask price which is the sell price.

When we look to go long on the GBP/USD we get entered into the trade by the Bid price, when we look to go short on the GBP/USD we get entered into the trade by the Ask price.

You’ll notice the Bid and Ask prices are always slightly different – usually only by a few points – and this is known as the spread. The spread is how brokers make their money and it’s basically their commission.

We can’t avoid paying the spread but it gets added differently to trades depending on whether we go long or short on a pair.

The spread is only paid once though for each trade.

So if we go long on the GBP/USD, we get entered using the Bid price + the spread, when we close the long we exit using the Ask price (no spread included).

If we go short on the GBP/USD, we get entered using the Ask price (no spread added), when we close this short we exit using the Bid price + the spread.

So we pay the spread when we buy but not when we sell.

We do need to take the spread into account when we enter trades and this is discussed in further detail in the advanced price action course.

Module 1: The Basics

Module 2: Market Analysis

Module 3: Price Action Setups

Module 4: Chart Setup

Module 5: Trade Management

Module 6:  Trade Psychology

Module 7: Continue your learning