A:

A standard forex account has specific lots and pip units. A lot is the minimum quantity of a security that may be traded, while a pip is the smallest amount by which a currency quote can change. Typically, one lot is worth $100,000 and a pip unit is stated in the amount of $0.0001 for U.S.-dollar related currency pairs. This is the most common pip unit and it is used for almost all currency pairs. Pip value is the effect that a one-pip change has on a dollar amount. It is important to note that pip value does not vary based on the amount of leverage used, but rather that the amount of leverage you have affects the pip value.

Leverage is the amount of money you are able to spend as a result of borrowing investment capital. Basically, the more leveraged you are, the riskier your position - a decrease of a few pips could mean losing all of the money in your account. For example, with a standard lot size of $100,000, pip value is $10 ($100,000 x 0.0001). If your account contains $10,000 and you have a leverage of 150:1, then you will have $1.5 million ($10,000 x 150) or 15 lots ($15,000,000/$100,000) that you can use for investing. It would be extremely risky to use the entire $1.5 million that you have available because each pip is worth $150 and you could clean out your account just by losing 67 pips ($10,000/150). Although there is large downside risk to having high leverage, there is also a large upside gain - if you were to make 67 pips instead, your account value would double, and you would rake in 100% returns in one day!

Increasing your leverage increases the volatility of your position because small changes in pip value will result in larger fluctuations in your account value.

For further reading, see Getting Started In Forex, A Primer On The Forex Market, Common Questions About Currency Trading and Using Currency Correlations To Your Advantage.

RELATED FAQS
  1. Where did the term 'pip' in currency exchange come from?

    Learn the definition of a pip, what it means in the scope of currency exchanges and how to determine its value. Find out ... Read Answer >>
  2. What is a pip and what does it represent?

    A pip is a very small measure of change in a currency pair in the forex market. It can be measured in terms of the quote ... Read Answer >>
  3. What is the value of one pip and why are they different between currency pairs?

    In forex markets, currency trading is done on some of the world's most powerful currencies. The major currencies traded are ... Read Answer >>
  4. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  5. It's my first time investing and I would like to know whether to choose margin or ...

  6. How does leverage work in the forex market?

    The concept of leverage is used by both investors and companies. Investors use leverage to significantly increase the returns ... Read Answer >>
Related Articles
  1. Trading

    How Leverage Is Used In Forex Trading

    Forex trading by retail investors has grown by leaps and bounds in recent years, thanks to the proliferation of online trading platforms and the availability of cheap credit. The use of leverage ...
  2. Trading

    Leverage's "Double-Edged Sword" Need Not Cut Deep

    Learn to cut out losses quickly, leaving profits room to grow.
  3. Trading

    Forex Minis Shrink Risk Exposure

    Trading less than a standard lot means getting in for less - and having less to lose.
  4. Trading

    Forex Leverage: A Double-Edged Sword

    Find out how this flexible and customizable tool magnifies both gains and losses.
  5. Trading

    Adding Leverage To Your Forex Trading

    The use of margin to trade in the foreign exchange market can magnify profit opportunities.
  6. Trading

    What Is A Pip?

    Learn how this measure of change is used in trading currencies on the forex market.
  7. Trading

    6 Steps To A Rule-Based Forex Trading System

    Learn to add structure to your trading methods with these six important steps.
  8. Trading

    Top Reasons Forex Traders Fail

    This market can be treacherous for unprepared investors. Find out how to avoid the mistakes that keep FX traders from succeeding.
  9. Trading

    Position Sizing: The Way To Profit In Forex

    Position sizing will account for the quickest and most magnified returns that a trade can generate.
  10. Trading

    Top 5 Questions About Currency Trading Answered

    To trade currency successfully, it helps to know the answers to these basic questions.
RELATED TERMS
  1. Nickel

    A slang term meaning five basis points, or five pips. A nickel ...
  2. Pip

    The smallest price change that a given exchange rate can make. ...
  3. Maximum Leverage

    The maximum size of a trading position permitted through a leveraged ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Micro Account

    A forex trade made up of contracts for 1,000 units of currency. ...
  6. Lot

    In general, any group of goods or services making up a transaction. ...
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center