Each year millions of investors based in India shift from trading other financial instruments to forex due to its emergence as one of the most profitable endeavour. But trading scenarios in forex could quickly turn from good to bad and then to worse if traders do not pay attention to the market fluctuations. To avoid making general mistakes, traders should also familiarise themselves with the different terms used by forex enthusiasts and brokers such as margin, lots, and leverage. Unless you know these, finding margin available for lot trading in forex in India could be a daunting task.
Experts say that trading forex requires complete knowledge about how financial markets work and a bit of experience in utilizing the trading platform. So let us explain in this guide.
- Lots
- Margin
- Leverages
- Margin available per lot for Indian forex traders.
What Are Margin and Leverage?
To open a trade, forex traders need to pay a specific amount as instructed by a forex broker of their choice. This small amount of capital that traders put to begin trading forex is called margin. Traders may consider margin as a deposit made in good faith or as collateral required solely for opening trade positions and keeping them open for a specific time. When it comes to margin available for lot trading in forex in India, it is important to mind the following facts:
- It is not a “fee” or a “transaction cost.” It is simply a portion of your funds.
- Margin is predominantly represented as a percentage (%) of the intended position’s size
- The margin amount varies depending on the forex pair and forex broker chosen by a trader.
Example: Suppose if a forex trader is planning to buy $100,000 worth of USD/GBP then it is not necessary to put all that money. Instead, they only have to put a portion of the actual amount (depending on which broker they are using). When the trade has closed, the margin amount (which can be re-used to open new trades) is reimbursed into the trader’s account.
Required Margin: Margin is generally expressed as a percentage because when margin indicates a particular amount, it is called a required margin. Every single trading position has its pre-determined required margin amount needed to lock it up.
Tip: Read more about margin at https://www.investopedia.com/ask/answers/06/forexmargin.asp
Example: While opening a position worth $1000 trade size with 2% margin, its margin requirement becomes $20.
Leverage:
It is clear to see for Indian forex traders that margin and leverage go hand in hand as useful tools that allow people to trade with large amounts of money but at considerable risk. Leverage is expressed as a ratio between the amount of money one has and the amount one can trade. To understand leverage, think of a broker as a “bank” that lets you create leverage using margin and increases your trading power. You could calculate leverage if you determine the margin requirement as follows:
Leverage = 1 / Margin Requirement.
If margin requirement is 2% for a currency pair then leverage is: 1 / 0.2 = 50; it is written as 50:1
Example: If your broker gives you 100:1 as leverage then it means for every $1000 in your trading account, you can control standard size lot (worth $100,000 of currency). To start leveraged trading, you must have is the $1000 in your trading account as margin.
What Is A Lot in Terms Of Forex?
The particular amount of units that traders deal with while trading forex are called “lots.” Alternatively, you could define lots as the number of currency units that you buy/sell during forex trading. It is utilised as a measurement to decide a transaction amount. While placing orders on a broker’s trading platform, the sizes of orders correspond to Lots.
There are 4 sizes of lots generally used in forex trading which are;
1. Standard:
A standard-sized lot corresponds to 100,000 units and is perhaps the most preferred lot in the forex market. Traders who have a lot of experience in forex usually deal with standard size lots only.
2. Mini:
A mini-sized lot means 10,000 currency units it is also known as fractional since it is 1/10 of a standard lot. Mini lots can be used whenever but cryptocurrency traders usually trade with mini-sized lots.
3. Micro:
Micro-sized lots stand for 1000 units and are rare to find in forex markets. Micro is a type of fractional lot size which is commonly found on such forex broker’s trading platform that offers their customers CFDs.
4. Nano:
Nano lots are considered the smallest of all fractional lot sizes representing only 100 units. Therefore, it is also quite rare to find on foreign exchange brokerage platforms. Like mini lots, these are chosen by people who trade with crypto and metals.
Tip: Some new forex traders get confused between pips and lots. Pip is simply a chance in the value of a currency relative to another. Traders can learn more about different types of Lot sizes at https://www.babypips.com/learn/forex/lots-leverage-and-profit-and-loss
Example: It is a considerably small percentage concerning lots size that can be calculated as shown below:
Assuming a standard-sized lot for a currency pair such as USD/GBP at a rate of 118.70, the pip changes to (0.1/118.70) x 100,000 = $8.4 per pip
Correlation Between Lot Size and Profit/Loss
Every broker follows a different convention for calculating pip value associated with a lot size. But no matter which forex broker that a trader might choose, it would present the pip value for any currency they are trading at a given time.
Following is a simple table depicting how lot size influences dollar/pip and forms a correlation with profit/loss.
| Lot Size | Units | Volume | Dollar/Pip |
|---|---|---|---|
| Standard | 100,000 | 1.000 | 10 |
| Mini | 10,000 | 0.1 | 1.00 |
| Micro | 1,00 | 0.01 | 0.10 |
| Nano | 100 | 0.001 | 0.01 |
How Lot size changes depending on leverage?
When you are using MetaTrader 4 trading platform to trade forex with a broker of your preference, many would notice that it sometimes does gives you an option to change the lot size but not leverage. It happens because leverage is chosen at the account level and not for individual trade whether you are on a demo or a live trading account. It is important to remember that lot changes based on the leverage offered by a broker. However, leverage does not affect the size and price of a trade. It simply determines the size of the trader’s position. More leverage means traders can afford larger lots in quantities that could exceed their funds.
Tip: Read more at https://www.investopedia.com/articles/forex/07/forex_leverage.asp
Unplanned leveraged trading involves risks that are too complex for new traders to understand but a good amount of practice and the following can prove to be of some help.
- Opening a demo account with an FX broker
Instead of going for a live trading account, open a demo account with a forex broker of your choosing. After signing up, you have to get accustomed to its trading platforms and functionalities including leverage.
- Changing lot on constant account balance
You can change the lot size while keeping the account balance that acts as a margin for leveraged trading as constant to see how it affects the leverage. As per rule, for constant account balance, if lot size increases, so will leverage.
Recommended margin available for lot trading in Forex in India
As we already know by now that margin is referred to as $X per Lot. So if a forex broker asks for a $10 margin per mini lot then it means that during the trade, $10 in your account is locked as margin almost like a security deposit. Traders cannot use that money to cover any losses which might occur at the end of the trade. To figure out the right number of lots for trading, utilise the formula: No. of Lots: (Account Balance x Risk %) / (Stop Loss x Pip Value)