Forex investments are great options for those looking for an alternative to traditional investments. There are many advantages to opting for this investment style including the ability to trade 24 hours a day, it’s a market high with liquidity, and the fact that it’s regulated, which gives people more confidence. However, despite its benefits, there are also many moving parts and inner complexities that can make forex trading a little difficult to understand.
That’s why we here at CWS Capital want to help clear up some of the confusion. Namely in regards to lot sizes, which appear on our client quarterly statements – all in an effort to help educate so you can make better decisions when trading. Keep reading to learn more.
Understanding Forex Investment Lot Sizes
A forex investment undertaking involves the process of investing in currency. As such, forex is typically exchanged in specified amounts known as lots. Lots essentially represent the quantity of currency units you can buy and sell. Think of a ‘lot’ as a portion that estimates the amount of a transaction.
As you put orders into a forex investment fund through your trading platform, the orders are put in sizes and then reproduced into lots. The common size represented by a lot is 100,000 units of currency. However, there are now nano, mico, and mini lot sizes as well:
- Nano – 100
- Micro – 1000
- Mini – 10,000
- Standard – 100,000
The change in one currency value compared to another is estimated in “pips,” which is a very minute ratio of a unit of currency’s value. To make the most of this small alteration in value, larger sums of a certain currency must be traded in order to realize any large losses or profits.
For example, say you’re using the standard 100,000 unit lot size. At this point, we will recalculate a few instances to see how it impacts the value of the pip.
- USD/JPY with a rate of exchange equating to 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
- USD/CHF with a rate of exchange equating to 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip
In instances where the USD (U.S. dollar) is not the first to be quoted, the procedure is moderately different.
- EUR/USD with a rate of exchange equating to 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded will be $10 per pip
- GBP/USD with a rate of exchange equating to 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded will be $10 per pip.
It’s possible that your broker might employ a different method for calculating pip values compared to lot sizes. However, regardless of how they do it, they can tell you the value of the pip for the unique currency you’re trading at that specified period of time.
As the market shifts, the pip value will alter as well based on the currency you happen to be presently trading.
What is Leverage?
You may be curious as to how a non-institutional investor such as yourself can trade larger sums of money.
Think in terms of your broker being a bank that essentially lends you $100,000 to purchase currencies.
The only thing the bank requests is that you provide it with a $1,000 deposit as a form of good faith, which it will take possession of for the time being, but not actually keep.
Does this sound like hyperbole to you? It’s actually anything but. In fact, this is the way forex trading utilizes leverage. The sum of leverage you utilize will be based on your particular broker, in addition to what’s most comfortable for you.
Usually, the broker will ask for a deposit (or a margin as it’s also referred to).
When your money is deposited, you’ll then have the ability to begin trading. Additionally, the broker will also detail the margin amount needed per lot that’s being traded.
For instance, if the permitted leverage is at 100:1, but you wanted to trade a position valued at $100,000, but you were only sitting on $5,000 within your account.
Your broker would save $1,000 as a deposit and then “lend” you the remaining amount. Any gains or losses will, of course, be added or taken from the excess balance of cash within your account.
The minimal margin for every lot will fluctuate between brokers.
Moreover, it’s important to keep in mind that the $1,000 deposit is not a fee. But rather, it’s a deposit – and once the trade is closed, you will get it back.
The reason for the broker requiring this deposit is that it is a risk of losing your position while the trade is open.
Education is key to any endeavor, and forex investing is no different. By having a deeper understanding of the ins and outs of the forex investment process, you’ll be in a better position to make wise choices and reap the benefits of those choices. For this reason, CWS Capital is committed to helping you understand the complex world of forex investing.
If you’d like to learn more or are interested in a forex investment fund, contact us today to see if you qualify. We look forward to hearing from you.