October 18, 2017

What is Leverage, Margin, Margin Call, Pip's and Lots

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Leverage

In the forex market there is a possibility Trader leverage its capital. For traders who are not disciplined and educated, leverage can be very dangerous. But for those who are disciplined and educated, leverage is powerful tool that can literally boost their profits.

Leverage helps the Trader to negotiate a certain amount, having only a small fraction of it. In the stock market, there is no leverage in most cases. If you are buying R $ 5,000.00 in Petrobras shares, you need to have, at the time of negotiating the amount of R $ 5,000.00. With the use of leverage, the trader can operate with higher values, but having lower.

A leverage of 1: 100 means that for every $ 100 traded, the trader will need to have only 1. Recently, after the 2008 crisis, the US government has set strict rules and to leverage that country. There, the limit is 1:50. According to the rules of forex countries, leverage may suffer multiple values. As an example leverages 1:10 or 1: 1000.

To make it clear I will give another example. John wants to make the purchase of a whole lot of EUR / USD (100,000 dollars). Using a leverage of 1: 100, John need to have on hand just the amount of 1,000 dollars.

If leverage is used in a responsive way, you can become a great tool to get many profits in Forex.

Margin

The margin is a security value that all brokerage charges its customers. in most cases this value varies according to the leverage that the trader uses. If they are using a leverage of 1: 100, then the broker will require the value of one dollar for every 100 traded. This value is retained by the trader to the broker closure, where the value is returned. It is a way for the trader not break your account and not the broker out at a loss.

For example, let's assume that John has an account of 1,000 dollars and use the leverage of 1: 100, getting a lot of EUR / USD. In this case, the broker will charge a 1% margin, given that the leverage is 1: 100, so John can not perform this operation with only 100 US dollars in the account. In this case John must have at least 2000 US dollars for 1000 will be held as margin brokerage. Usually the banks rates are 1% or 2%, depending on the broker.

Margin Call

Many investors are afraid of the word. The margin call occurs when the trader trades with a very strong leverage and little money available to cover the margin. When an operation starts to become looser as to endanger the entire initial margin retained by the broker, the broker contacts the customer giving you two options: close the account in injury or add funds to cover the margin previous.

Lots

Lot simply means the amount of particular pair of currency units the trader is trading.

A lot = 100,000
Um minilote = 10000
A microlote - 1000

To illustrate, imagine john bought 60,000 EUR / USD. John actually bought 6 Minilotes = 6 x 10,000 = 60,000

Pip

A pip is the smallest unit that is accounted for the calculation purposes in the forex market. Each currency pair is shown with several decimals. In EUR / USD, for example, the pip is counted until the 4th digit after the decimal point. In most pairs 1 PIP is equivalent to 1% of the value of a currency.

In the image below Pip is the 4th decimal place. The fifth decimal place is known as 1/10 of a pip.


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