Forex Leverage for Beginners Explained (lot sizes and pips)

Forex Trading Tutorial
Forex leverage is a great tool for beginners in forex trading to understand. In this video I will explain everything you need to know about forex leverage, pip, and lot sizes.

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Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of forex, money is usually borrowed from a broker. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up—and control—a huge amount of money.

To calculate margin-based leverage, divide the total transaction value by the amount of margin you are required to put up:

Margin-Based Leverage = Total Value of Transaction / Margin Required
For example, if you are required to deposit 1% of the total transaction value as margin and you intend to trade one standard lot of USD/CHF, which is equivalent to US$100,000, the margin required would be US$1,000.

Margin-Based Leverage Expressed as Ratio Margin Required of Total Transaction Value
400:1 0.25%
200:1 0.50%
100:1 1.00%
50:1 2.00%
However, margin-based leverage does not necessarily affect risk, and whether a trader is required to put up 1% or 2% of the transaction value as margin may not influence their profits or losses. This is because the investor can always attribute more than the required margin for any position.

To calculate the real leverage you are currently using, simply divide the total face value of your open positions by your trading capital:

Real Leverage = Total Value of Transaction / Total Trading Capital
For example, if you have $10,000 in your account, and you open a $100,000 position (which is equivalent to one standard lot), you will be trading with 10 times leverage on your account (100,000/10,000). If you trade two standard lots, which are worth $200,000 in face value with $10,000 in your account, then your leverage on the account is 20 times (200,000/10,000).

In the foreign exchange markets, leverage is commonly as high as 100:1. This means that for every $1,000 in your account, you can trade up to $100,000 in value. Many traders believe the reason that forex market makers offer such high leverage is that leverage is a function of risk.

In trading, we monitor the currency movements in pips, which is the smallest change in currency price and depends on the currency pair.

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The information contained here and the resources available for download through this website is not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, accountant or financial advisor, nor am I holding myself out to be, and the information contained on this Website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.

We have done our best to ensure that the information provided here and the resources available for download are accurate and provide valuable information. Regardless of anything to the contrary, nothing available on or through this Website should be understood as a recommendation that you should not consult with a financial professional to address your particular information. The Company expressly recommends that you seek advice from a professional.

*None of this is meant to be construed as investment advice, it’s for entertainment purposes only. Links above include affiliate commission or referrals. I’m part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

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