Financial Market (Part 6)

What is a 'lot'? 

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In trading, a "lot" represents the volume of a trade in units. In Forex, one standard lot equals 100,000 units of the Base currency. For example, 1 lot of EUR/USD equals 100,000 uros, while 1 lot of USD/JPY equals 100,000 US dollars.
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Thanks to modern brokers, traders can also access smaller lot sizes:
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• Standard Lot (1.0) = 100,000 units of base currency
  
  
• Mini Lot (0.1) = 10,000 units of base currency
  
  
• Micro Lot (0.01) = 1,000 units of base currency
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For other asset classes, a lot represents a different standardized quantity. For instance, 1 lot of gold equals 100 ounces. You can find specific lot sizes for each instrument in the specifications section on the Atmexx website.
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Lot size also affects the value of each pip or tick, which we explored in another lesson.

Understanding Leverage

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Leverage increases your purchasing power, allowing you to control a larger position with a smaller amount of capital. This can enhance potential profits, as you only need to deposit a portion of the asset's full value.
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But if used carelessly, leverage can quickly result in the loss of your entire equity - sometimes without you even realizing it.
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Because of this, leverage is often called a “double-edged sword.” It’s important to assess your risk tolerance before deciding how much leverage to apply.
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Available leverage may vary depending on your region or regulatory jurisdiction. Check the “Leverage Information” section on the Atmexx website for details.

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Understanding Leverage

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Leverage is commonly described as trading with “borrowed funds,” but this isn’t entirely accurate. Your broker doesn’t add funds to your account, instead, the funds required to open a trade will be reduced based on your chosen leverage level.

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For example, trading 1 lot of EUR/USD (worth €100,000) without leverage (1:1) would require €100,000 in your account. But with leverage of 1:10, only €10,000 would be required to place the same trade.

Let’s explore some practical examples to see how this works.

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Understanding Leverage

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There are two possible scenarios, let's look at the first one. 
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Scenario A – Profitable Trade
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Let’s say you start with a €1,000 deposit and use 1:100 leverage. This gives you a buying power of €100,000. You open a Sell position on EUR/USD and the price then drops by 100 pips. As a result, your profit would be $1,000* 

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*Exact amount depends on the “term” currency in the pair.

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Understanding Leverage

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Scenario B: Loss with Leverage
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Now let’s say you again invest €1,000 and open a Buy position of €100,000 on EUR/USD, but instead of rising, the price drops 100 pips. In this case, your €1,000 deposit could be completely lost.
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During volatile market conditions, especially when using high leverage, your account balance can vanish almost instantly. 
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This is why it’s critical to understand how leverage, risk, margin, and free margin are connected. We’ll explore this in the next lesson.

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How Leverage Affects Trading Costs

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It’s important to know that leverage not only increases potential profits and losses but also amplifies any costs linked to your trades.
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For instance, imagine you're trading an asset priced at $1,000, and the spread is 0.1%.
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If a trader deposits $1,000 and uses no leverage (1:1), the cost of the spread would be $1, meaning equal to 0.1% of the trader's capital.
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However, if the trader uses 1:10 leverage, his position size becomes $10,000 and in this case, the spread would be $10, which is 1% of the trader's original deposit.
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This concept also applies to other trading costs, such as rollover fees and commissions.
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While this is a simple example, it highlights how leverage can significantly amplify trading costs relative to your deposit - an essential concept to grasp when managing risk.

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Key Takeaways from This Lesson

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• “Lots” are used to define trade volume in Units.
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• In Forex, 1 standard lot = 100,000 units of the base currency. The smallest tradable size is 0.01 lot (micro lot).
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• Leverage increases your buying power, allowing you to open larger trades than your actual deposit.
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• Leverage is a “double-edged sword” - it can boost potential gains and also increases the risk of loss. Use it cautiously and always consider your risk tolerance.