Lot and Margin

Trading CFD assets, whether forex, cryptocurrency, stocks, or indices, often uses a unit, or what we know as a lot, to determine the size of the contract to trade that asset and a margin to provide the broker with the capital to trade the asset.

In this lesson, we will explain the details of trading and the basic knowledge of

1. Lot Size and Contract Size
2. Margin and Margin Free
3. Margin Level (%)

 

Lot size

Lot size is a unit of measurement for the contract size for trading an asset.

1 lot of each asset usually has a different value; for example, 1 lot size of forex will have a contract size or contract value equal to 100,000 units of that currency.

While gold, 1 lot will have a contract size of 100 oz (troy ounces).

 

In addition, lot size can also be divided into 3 types of contract sizes:

1. Microlot is the smallest contract size, suitable for gradual investment, where 1 lot will have a trading volume of 1,000 units. If you trade in USD, it will be equal to 1,000 USD.
2. Mini Lot is a contract size that is 10 times larger than a micro lot, where 1 lot will have a trading volume of 10,000 units. If you trade in USD, it will be equal to 10,000 USD.
3. Standard Lot, where 1 lot will be equal to 100,000 units, and if you trade in USD, it will be equal to 100,000 USD.

Standard is the current contract size, covering all account sizes, from Micro, Mini, and Standard by using a reduced contract size.

 

For example

If you want the contract size to be 1,000 units, the lot size used will be 0.01 lot.

If you want the contract size to be 10,000 units, the lot size used will be 0.1 lot.

And if you want the contract size to be 100,000 units, the lot size used will be 1 lot.

Finally, when trading with different contract sizes, the value of 1 pip movement will have different values.

 

For example

For 1,000 units, the value of 1 pip movement will be worth 1 dollar.

10,000 units, the value of 1 pip movement will be worth 1 dollar.

And 100,000 units, the value of 1 pip movement will be worth 10 dollars.

 

Normally, Lot depends on Contract size.

If you buy EURUSD 1 lot, it means we have bought 100,000 EUR, which is valued according to the exchange rate, such as 1 EUR equals 1.08357 USD, 1 lot will be worth 100,000 times 1.08357 equals 108,357 USD

But if you buy XAUUSD 1 lot, it means we have bought 100 Troy ounce gold, which is valued according to the exchange rate, such as 1 Troy ounce equals 2733.54 USD, 1 lot will be worth 100 times 2733.54 equals 273,354 USD

 

Margin

What is Margin?

Margin is the money used as collateral for trading assets, or, in other words, the money that traders deposit into their accounts.

The amount of margin to be used will depend on the type of asset, the contract size (lots), and the leverage.

From the previous lesson, using leverage allows traders to open positions with a larger lot size with a smaller amount of money. Let’s see how using leverage can help.

 

Margin is calculated using the following formula:

Margin equals (Price times Lot times Contract Size) / Leverage

 

If you buy EURUSD at the current price of 1.08357 for 1 lot using leverage of 1:100, the required margin is 1,083.57 USD.

But if you use leverage of 1:1000, it will become 108.357 USD.

However, trading with other lot numbers will result in different results according to the calculation formula.

 

What is Free Margin?

The remaining margin in the account is the amount of money in the trading account that is available to open a new position.

It can be calculated as the capital minus the margin used out of the account.

 

Margin Level (%)

Margin level is the ratio of equity to used margin, expressed as a percentage. which can be calculated as follows

Margin Level = (Equity / Margin) x 100

 

Margin level plays an important role in determining whether traders will be able to open new positions

If the margin level is 0%, it means that the account has no open positions.

However, a margin level of 100% means that the account's equity is equal to the used margin, and the broker will not allow additional trading in the account until additional deposits are made or profits are made from additional open positions.