Leverage, Currency Lots, and Why You Need a Broker

In order to make money trading currency based on increases and decreases of a currency increment as small as pips, only trades involving hundreds of thousands of dollars must be traded. This is where leverage comes in (see our set on “Leverage”). Leverage comes in the form of currency lots. An example of a lot is $100,000. Since pips are so small, a FOREX trade of $100,000 can actually result in a nice profit of a few hundred dollars. Because most everyday Joes do not have $100,000 sitting in the bank, FOREX traders borrow currency lots from brokers. These loans become the trader’s leverage.

Currency lots come in different sizes. An example macro lot would be $1000. The next level up is a mini lot (e.g., $10,000). A larger lot would be that of $100,000. Gains and losses are determined based on pip values, which are calculated in terms of lot sizes. Different brokers determine these values in similar ways, but the important fact here is that your broker will calculate them for you.

Therefore, a broker is an essential part of the trading FOREX online process. The important thing to note here is that choosing a broker is crucial to your FOREX trading success. There are scandalous online FOREX brokers out there, who implement policies that work against your ability to make money trading FOREX, but there are also legit brokers, who adhere to good business practices and carry out the business of FOREX trading based on the regulations of regulatory organizations.

First and foremost, if you are planning on taking up FOREX trading, the most important thing you can do, alongside read up on the basics of FOREX trading on this website, is to practice. Most reputable brokers offer simulated practice trading sandboxes that you can “play” around in before you do the real thing. Let me reiterate that this is the most important thing you can do! Make sure the broker you choose has a demo account option; like I said, most reputable brokers do offer this.

It is important to get used to a broker’s order options and policies prior to jumping in headfirst without any experience with a broker’s software and trading application. If you should try out a broker’s practice program and not like it, choose another broker (carefully) and then try out their practice program. Brokers all operate under slightly different conditions (e.g., order options, minimum security margin requirements, usable margin minimums, rollover interest rates, commissions, fees, etc.) Each individual trader has his own appropriate broker match. You can find yours with our help and a little bit of research.

See our “Choosing an Online FOREX Trading Broker” set for everything you will need to look for when you choose your FOREX broker and how to interpret broker policies.