Calculate the Correct Value of the Lot You Are Trading

When first starting out as a Trader it is hard to understand all the basics as most experienced traders assume you understand more than you do. One of the assumptions is that the value of a full Lot is USD$100,000. However this only applies if your base currency is $USD. The value of a full Lot is 100,000 units of the base currency. To refresh your memory,the base currency is the currency named first in the currency pairing.

Example: EURGBP, the euro is the base currency.
Example: USDJPY, US dollar is the base currency.

Before you can calculate your leverage you must convert the base currency into the currency you opened the trading account with. For example if you open your account with USD and want to trade EUR:GBP to calculate how much you are paying in USD for each (or part thereof) lot you must check how much the EUR:USD is trading.

At the time of writing the EUR:USD is 1.3295-1.3298, therefore 100,000 units of EUR is going to cost USD$132980 not the assumed USD$100,000.

Let me give you another example.

If you are trading 100,000 GBPUSD, you actually trade dollars to the value of £100,000 (base currency) which is at time of writing is about $153,000. Therefore the value of your trade is a lot higher than you might of realised.

Now if you need to leverage your account, you are in a position to work out the true value of the trade before you enter into it. This is a must otherwise you could get a shock when you realise the value of the trade and what you are risking. Once you have calculated the actual value of the Lot size you are going to trade then and only then can you work out the true leverage. This is when you use the formula for Cours EUR USD working out leverage on your proposed trade.

Formula:

Divide your capital into the transaction size = True Borrowings

Here are 2 examples, one with the base currency being the same as your account, and the other one when you are trading EUROs but your account is in USD$s.

Example # 1 Your account is in Euros and you are trading EURUSD.
Margin is EUR10,000, and you buy EURUSD of 100,000 (1 Lot).
Calculate your leverage using the formula. 100,000/10,000 = 10:1. For every EUR1.00 of your
margin you trade with EUR10.00. The leverage is 10:1

Example # 2 Your account is in USD and you are trading EUR:USD
Margin is USD$10,000

At the time of writing EURUSD is 1.3298, which means if buying Euro you will pay $1.3298 USD.
If you buy 1 Standard lot the value is 100,000 units of base currency, which is $132,880USD.
Calculate your leverage using the formula. USD132880 / 10000 = USD$ 13.28. For every $1.00 of your margin you trade USD$13.28 The leverage is 13.28:1. Not 10:1 as you might have thought.

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