Let’s say that you want to trade a mini-lot, but you only have $1,000 in your trading account.
A mini-lot is 0.1 the volume of your trade size—in this case, $1 per pip. This creates a 10,000-unit position. That may sound odd, but when you trade a mini-lot, you’re controlling 10,000 units of currency. (I say units because your account may be in pounds, euros, yen or whatever.)
How can you control a 10,000-unit position with $1,000?
The answer is… through the wonders of margins and leverage.
Margin is essentially a down payment on a trade.
It’s like when you buy a house. You don’t have to put down the full value of the house; otherwise, you’d be paying upfront in cash. Instead, you offer a down payment equal to a percentage of the total purchase price.
When you buy a house, we’re talking about 10-20%. But in the world of currency trading, you only have to put up a small percentage (1-3%) of the total value of the position in order to take the trade.
This creates leverage.
Leverage is just like it sounds—it’s adding power to your existing capital. You can put up a small margin, which is then multiplied by your dealer’s leverage ratio… allowing you to order to control a larger position.
In other words, you can use a small trading account to trade larger position sizes… and maybe make more money.
Let’s say you have a $1,000 trading account. Your FX dealer is offering you 100:1 leverage. (50:1 is common in the United States, and will become more common around the world. But this math is a little easier.)
If you want it to trade seven mini-lots—or 70,000 units of currency—your margin is 0.7 the volume of your trade size, or $700.
But thanks to leverage, your dealer is willing to give you control of a position times 100 times larger than that (100:1).
Multiply 700 x 100, and you get $70,000. That’s your position size.
Now let’s say (using the same leverage as above) that you want to trade 10 standard lots. Each standard lot is 100,000 units of currency and $10 per pip. That means you’re controlling a position of one million units of currency, at a value of $100 for every pip.
If you divide one million units of currency by 100, you get your margin: $10,000.
One last example: Let’s say your dealer offers 50:1 leverage and you want to trade one mini-lot (0.1 of your trading account). One mini lot is $1 per pip. That’s 10,000 units of currency, and you have to put up $200 down as your margin (10,000/50=200).
It’s not magic, but it is a powerful tool that we have access to as traders. And it’s one that I’ve used extensively over the course of my career.
When I first started trading in the early 2000s, I was living on the East Coast of the United States. And I was getting up in the middle of the night to make my trades. I did that for a very important reason — I was trading currencies and the forex market is primarily active during the very early morning hours on the East Coast. But that isn’t the only session that works in favor of traders in certain parts of the world. Here’s how I decide not only what to trade, but when.