When the Greeks and Egyptians exchanged their currencies for gold and silver in the first and second centuries BC, no one thought that a market as large as Forex would emerge for currency exchange and people from all over the world with the most advanced Systems are engaged in exchange and currency trading in this market.
From the very beginning, this advanced market demanded its own terms and trading methods, and hence a series of basic concepts were formed in the forex market, among which we can mention spread, lot and leverage in forex.
Understanding the concept of spread, lot and leverage in forex is important for those who want to operate in this market.
in this article we will learn:
- Investigating the concepts of lot and leverage in forex
- Lot, One of the most important basic concepts in the forex market
- Pip and lot in forex
- What is the concept of leverage in Forex?
- What is a spread in forex?
- Understanding the basic concepts in the forex market is he first step to success in this market
- Frequently Asked Questions
- What is a lot in Forex?
- What is leverage in Forex?
- What is the spread in forex?
- Why should we learn the basic concepts in the forex market?
- What are the benefits of using leverage in Forex?
- What is the difference between buying and selling spreads and brokers’ commissions?
- How many spread models are there in the forex market?
Investigating the concepts of lot and leverage in forex
Getting to know the terms of the forex market helps traders to have a smarter and more informed presence in this market, to be able to use the features and facilities available in the market to their advantage and to achieve more income and profit.
If you are also interested in professional activity in the forex market and want to know the concept of spread, lot and leverage in forex, just take a few minutes and stay with us until the end of this article.
Lot, One of the most important basic concepts in the forex market
It was the first years of the 1970s when the forex market was formed in its current form. In the early years, few individuals and groups were able to participate in Forex trading, because being in Forex required a significant amount of capital.
At that time, people working in the forex market used the concept of lot to measure the volume of transactions.
In the context of measuring the volume of forex transactions, lot has the meaning of “kilometer” in measuring distance and “kilogram” in measuring mass.
In general, in the trading of currency pairs, a lot means 100 thousand units of the base currency. In each currency pair, we have a base currency and a counter or quote currency.
The base currency is written on the left side and the counter currency is written on the right side of the currency pair.
For example, in the EUR/USD currency pair, the euro is the base currency and the US dollar is the counter currency. When we say that we have bought a lot of the EUR/USD currency pair, it means that we have bought 100 thousand euros.
1 lot is a big number! Are there any smaller units than lots?
One of the issues that many people bring up is that buying 1 lot of a currency pair is difficult for many retail traders. Are there smaller units than lots to determine the volume of the transaction?
In the past, only capitalists and rich people were present in the forex market, and buying a few lots of a currency pair for them was not a significant number at all.
But today, due to the high value of the lot, the units of mini lot, micro lot and nano lot have been added to the forex vocabulary so that small traders can have a measure to express their purchase amount.
In the following, we will get to know the value of mini lot, micro lot and nano lot.
Different types of lot in forex
In this article, we are going to get to know the concept of lot and leverage in Forex completely. First, we introduce the types of lots in this section:
- Standard lot: It is the same lot and is considered equivalent to 100,000 units of the base currency.
- Mini lot: Each mini lot is equal to 0.1 standard lot and equal to 10 thousand units of base currency.
- Micro lot: Each micro lot is equivalent to 0.01 standard lot and equal to 1000 units of base currency.
- Nano lot: 1 nano lot is equivalent to 0.001 standard lot and equal to 100 units of the base currency.
Pip and lot in forex
The amount of people’s profit and loss changes with each pip, In this part of the article, we want to discuss the relationship between pip and lot in forex.
A pip is the smallest unit of exchange rate value in the forex market and is equal to one ten thousandth of the value of a currency pair.
In this section, we are going to check that if we trade with standard lot, mini lot, micro lot and nano lot, how much profit or loss will be brought by each pip change in the currency pair.
To put this better, let’s say we want to trade the EUR/USD currency pair.
- If we trade with a standard lot, each pip change in the EUR/USD value gives the trader a profit or loss of $10.
- If we want to trade a mini-lot of the EUR/USD currency pair, each pip change in the value of the currency pair results in a profit or loss of $1.
- If trading a microlot of the currency pair in question, each pip change will result in a profit or loss of $0.1.
- When trading a microlot of the EUR/USD currency pair, you should know that each pip change represents a profit or loss of $0.01.
What is the concept of leverage in Forex?
Another basic concept in the forex market that many traders deal with is leverage.
“The concept of leverage in Forex is that by depositing a small or insignificant amount of your own money, you can borrow significant financial resources from your broker and enter into a transaction with this entire amount.”
In fact, leverage is the credit that the broker provides to the trader, and the balance of the broker’s account is multiplied by using leverage.
As a rule, the amount of 100,000 dollars is too much and far from the mind for a retail trader, But the broker is willing to provide such an amount to the trader in exchange for a specific deposit.
You might think to yourself why a broker should do such a thing? If the trader does not have enough knowledge and skill and cannot win in his trade, will all this amount of credit be lost and will be a loss to the broker?
As a rule, brokers are much smarter than it. They only share the profit with you and if your trade loses money, they immediately withdraw and do not take any losses.
How brokers provide leverage services to traders
Leverage in forex is displayed as a ratio. For example, if a trader deposits 1,000 dollars in his account with a broker and the broker assigns him a credit of 100,000 dollars, the trader’s leverage will be 1:100 (1:100 leverage), Because the allocated credit is 100 times the trader’s deposit.
In the forex market, this $1000 deposit is called margin.
Now, if the trader enters the transaction with this credit and makes a profit, he can return the broker’s allocated credit and transaction fee to him and take the remaining profit from the transaction.
This is despite the fact that if the trader suffers a loss, the broker will not share the loss with him. In fact, if a trader receives a $1000 deposit and $100,000 credit, Broker will allow him to lose up to $1000. As soon as the trader’s loss exceeds 1000 dollars, the trade is stopped and the broker takes back the credit he had allocated.
What is a spread in forex?
Spread in forex is the difference between the purchase price (Ask) and the sale price (Bid) of a currency pair. For this reason, the spread is sometimes called the Bid-Ask Spread.
The purchase price is the highest amount that a buyer is willing to pay to buy a currency pair. Selling price is the lowest price that a seller is willing to receive in exchange for selling the desired currency pair.
The difference between these two prices is the buying and selling spread. This price difference is the share of brokers in exchange for the services they provide to traders.
Some brokers, along with the spread, also receive a commission from the traders for creating a deal and keeping it open.
Some brokers do not receive a commission for transactions from traders, but they announce the amount of the spread more.
An example of how to calculate the spread in Forex market transactions
When we want to calculate the amount of spread in a transaction, we must be familiar with the concept of lot and pip so that we can get help from these two concepts in a practical way.
Let’s assume that the ask price of the EUR/USD currency pair is 1.35640 and the bid price is 1.35626. The buying and selling spread of this currency pair is 1.4 pips.
If we trade one lot (100,000 units) of this currency pair, the number 100,000 is multiplied by 0.00014 and we reach the number 14. In fact, the buying and selling spread for trading one lot of this currency pair will be 14 dollars.
Spread, the silent killer of the forex market
You definitely know that in the forex market, the loss limit is activated when the price reaches our loss limit, but the point is that this is only the appearance of the story, and in the end, the loss limit is activated when the spread reaches our loss limit, but because In the forex market, the spread is very close to the current market price, so it is activated when the price reaches the loss limit.
But this happens only during normal market times, but when important news is published for the forex market, the spread goes from 1 to 2 pips to 40 to 50 pips in currency pairs and sometimes even more than 100 pips.
If we enter into a transaction or have an open transaction in advance, our transaction will definitely face the loss limit, and this happens when even the price candles do not reach our loss limit, because the loss limit is so high that from Price candles are very far apart.
So remember that we never trade during the news and close our deals before the news because it doesn’t matter whether the price is in the direction of our trade or against it, we will definitely face the limit of loss.
Understanding the basic concepts in the forex market is he first step to success in this market
In this article, we tried to fully and practically get to know some of the basic concepts in the forex market and understand the concept of spread, lot and leverage in forex.
To be successful in any industry and work, it is necessary to learn the basic terms and concepts of that work. Familiarity with these basic terms and concepts in the forex market will familiarize us with the capabilities and possibilities of the market and allow us to be present in the market with maximum power and gain profit.
If you understand well the concept of spread, lot and leverage in forex and you want to get acquainted with more basic concepts, it is suggested to read the article on types of orders in forex and how to use them.
This article will help you get to know more features of the forex market, reduce your losses in this market as much as possible and increase your profits.
Which terms and basic concepts in the forex market have been useful and attractive for you? Are you familiar with the types of orders in forex? In your opinion, what are the benefits of knowing the basic concepts? Please share your thoughts and suggestions in the comments section (below this article) with us and other readers
Frequently Asked Questions
What is a lot in Forex?
A lot in the forex market is a unit for measuring the volume of transactions. For example, when we say that a trader has bought a lot of the EUR/USD currency pair, it means that he has bought 100,000 euros.
What is leverage in Forex?
Leverage in Forex refers to the amount of financial leverage that allows traders to multiply their investment and use more of their capital for trading. In other words, it allows traders to buy or sell more currencies with less capital.
For example, if a trader has a leverage of 1:100, he is allowed to multiply his capital by 100 times. This allows him to enter into larger and higher volume trades with less capital.
What is the spread in forex?
Spread in Forex refers to the difference between the bid price and the ask price of a currency pair. The forex market is characterized by two prices: the buy price, which is usually lower and is called the “bid price,” and the sell price, which is usually higher and is called the “ask price.”
The spread is the difference between these two prices.
Why should we learn the basic concepts in the forex market?
Getting to know the basic concepts in the forex market makes us have a better understanding of the market and these terms prepare us to have better and more profitable transactions.
To avoid common mistakes, manage risk and be more productive, we have to learn terms like lot, leverage and spread in the forex market.
What are the benefits of using leverage in Forex?
The correct, intelligent and conscious use of leverage in forex allows traders to easily secure the amount they cannot afford, enter into the desired transaction and make a great profit for themselves. Leverage has taken the hands of many traders and lifted them off the ground.
What is the difference between buying and selling spreads and brokers’ commissions?
The buying and selling spread is the difference between the purchase price and the sale price of a currency pair. This spread is given to brokers.
Commission is the amount that some brokers receive from traders for providing trading services. Some brokers charge commissions and spreads from traders. Others don’t take commission, but they get more spread.
How many spread models are there in the forex market?
The spread in the forex market is divided into fixed and floating categories. The fixed spread does not change during the transaction.
The floating spread is such that it changes with the change in the buying and selling price of the currency pair during the trading time.