- Welcome back, everyone. I'm Rob Booker. Welcome back to our FX
trading one-on-one lessons. I'm super happy to be with you. Let's say, for instance, Nate, who is running the cameras as always, let's say that you want
to trade a mini lot. Remember that was .1 and it was worth $1 per pip. That is 10,000 units of currency. That seems odd but when
you trade a mini lot, you're controlling
10,000 units of currency. But let's say, Nate, that you only have $1,000 in your trading account. How can you control a
10,000-unit position, and I say units 'cause your account may be denominated in
pounds or euros, or yen, or whatever, how can
you trade 10,000 units of currency with only a $1,000 account? - [Nate] Talk to Broker? - Talk to EF Hutton. (laughs) Talk to your broker. It's through the wonders
of margin and leverage, and in this longer lesson, which you may want to return to later, we're going to discuss a topic in really simple, easy-to-understand terms that most people never get. But it's really important. Your margin, Nate and everyone else, is essentially a down payment on a trade. Now, when you buy a house, you don't have to put down the full value of the house, otherwise you're buying
the entire house for cash. You offer a down payment equal to a percentage of the
total purchase price. Nate, sometimes that's 10%, sometimes that's 20%. In the world of trading, you may only have to put up 2%. You may only have to put up 1%. You only have to put up 3%. But generally speaking, in the world of currency trading, you only have to put up a small percentage of the total value of the position in order to take the trade, and that's called leverage. Leverage is just like it sounds. It's adding power to whatever existing capital you have. Leverage is, in other
words, the beautiful thing that your FX dealer will offer you that allows you to put
a small down payment up and then multiply that down payment by a certain number in order to control a larger position. In other words, your dealer will let you control a large position with a small initial investment. Alright, let's see if I can pull this up correctly. There we go. Now, let's say that you have a $10,000 trading account, Nate, and you want to put up $1,000 as your down payment. Now we're gonna use the word margin, down payment, margin,
down payment, margin. You're gonna put up $1,000 as your down payment or your margin. And let's say that your
FX dealer offers you 100 to one leverage
meaning they're willing to let you put up only 1% of the total value of your position. How big of a position can you control with a $1,000 down payment or margin, if they offer you 100 to one? Nate says he's really bad at math. I'm gonna give everyone watching, I'm gonna give you some
time to think about it. I'm gonna give Nate some
time to think about it. - [Nate] Is it 10,000? - It's not 10,000. I know a lot of you might have thought it was 10,000. But if 1,000 is 1% of
your total position size, if your FX dealer is offering you 100 to one leverage, they're willing to increase your down payment 100 times. - [Nate] 100,000. - So it's a 100,000-unit position. In other words, Nate,
in some trading accounts around the world you can put up a $1,000 margin, down payment, and control 100,000-unit position or a standard lot. That allows you to take
a small trading account and trade larger position sizes and maybe make a more
significant amount of money. Let's use some examples here, Nate. So let's say, Nate, you have a $1,000 trading account. And let's say that you
trade in a jurisdiction that offers a maximum
of 50 to one leverage where the FX dealer will multiply your down payment by 50 times. This is common in the United States and it will be more
common around the world, 50 to one as a maximum. It's a huge, giant amount of leverage. So let's say that you take, Nate, out of your $1,000 trading account size, let's say you offer to put up $100 as margin, and I'll call that MGN. Your broker, because your FX dealer is offering you leverage, is willing to multiply that times 50. What's 50 times 100? Well, it's pretty easy. Alright, so a five, zero, zero, zero. Your dealer is willing to let you control a 5,000-unit position,
which is five mini lots, if you watched that video on pip values and trade sizes. That's five mini lots, or $5 per pip. So in a $1,000 account,
if you made 10 pips, you'd make $50 on a $1,000 account, $50 one day, $50 another
day, $50 another day. 10 days in you've made $500, or 50% of your account value, even though you have a small account. You're racking up some
pretty serious gains even though you don't have a large trading account. Let's do another example. So we'll drive this point home. Let's say, Nate, once again, we'll try some smaller account sizes. Let's say you have a
$1,000 trading account. Let's say that your FX
dealer is offering you, let's do 100 to one, 'cause that math is a little bit easier. Let's say you live in Europe or the UK or Australia where you can still get 100 to one or even higher. You have a $1,000 trading account and, Nate, I want you to tell me, if you have 100 to one leverage, so you could really multiply things, you could really do something crazy here. Let me ask you. If you wanted to trade five, no, we did five mini lots just now, let's do seven mini lots. You want to trade seven mini lots, which is a .7 in your volume, as we talked about in our previous lesson, that is seven minis, and that is equal to how many units of currency? - [Nate] $7. - 70,000 units of currency. Alright? So it's a .7 volume in your trade size in your broker's platform, your volume. That's seven mini lots. And it's a position value of 70,000 units of currency. Now, your broker offers
you 100 to one leverage. They're willing to multiply whatever down payment
you put by 100 times. So what you have to figure out is can I trade seven mini lots? The first way to find the answer to that question is, you simply go to your trading platform, Nate, and you simply type in .7. And I don't have my keyboard right here but I could just try. I could try to type in .7 and then, if it takes the order then I was definitely able to make that trade. Fine. Okay, great. So it's possible that
maybe they allowed it. But what we also need to know is how much do you really
need to put up as margin? What are they gonna take out of your trading account and set aside as your down payment? And the answer is they are gonna take $700 as your down payment. They're gonna take $700. 700 times 100 is seven plus one, two, three, four zeros. One, two, three, four. And that gets you to your position size. Once again, let's do another example and we'll talk about it. If your dealer offers
you 100 to one leverage. You live in Europe or the UK or Australia. And, Nate, let's say you want to trade, let's do something crazy. Let's say that we want to trade 10 standard lots. Each standard lot is
100,000 units of currency, as you learned in the previous lesson. That means we're gonna do a position of 1,000,000 units of currency. That makes sense so far? Now, if each standard lot is $10 a pip, what's your value per pip if you trade 10 of them? - [Nate] 100. - Yep, it's $100 for every
pip the market moves. Largest trade size I ever took was 80 standard lots, $800 a pip. It was a big, big trading account but I was still pretty freaked out. So let's say you want to control it, let's say you want to
trade 10 standard lots, that's 1,000,000 units of currency, and your broker offers
you 100 to one leverage. What you need to do is you need to divide 1,000,000 by 100. Now, that's just to
simplify the whole process. That's gonna mean that you have to put up $10,000 as your down
payment or as your margin. 10,000 times 100, let's just check our math, one with one, two, three,
four, five, six zeros. One, two, three, four, five, six. There we go. So we worked backwards from there. Let's do another example just to make sure we're all on the same page. Let's say that your dealer
offers 50 to one leverage, and let's say you want
to trade one mini lot. One mini lot is expressed as a volume size of .1 in your trading account and one mini lot is $1 per pip. It's a nice small trade size. And you want to just trade one mini lot and your dealer offers
you 50 to one leverage on the currency pair that you're trading. What we have to do is we have to find out how many units of
currency is one mini lot. 10,000. It's 10,000 units of currency. So we have to divide 10,000 by 50, and that is 200 bucks. $200 times 50 is 10,000. And there you go. You need to have $200 put up as margin to make that trade. So, once again, it all comes down to this. Most people just want to know can I trade, can I trade one mini? Can I trade five micros? Most people wanna know the answer to that question and in order to answer that question, you just need to know the leverage that your dealer offers you, and then you need to know, well, that's it. You have to divide the units by the leverage. Let's do one last
example just to make sure we're all on the same
page, just to make sure we're all here, we're all together. Let's say you want to trade two mini lots. And let's say your dealer offers you 100 to one leverage. How many units is two mini lots, Nate? You can take a guess. - [Nate] .2? - That's the volume,
that's the trade size. That's the trade size. .2 is the trade size. What's the pip value on two mini lots? Every pip it moves? - $2.
- It's $2. And the number of units of currency that you are controlling? - 20,000.
- 20,000. Now, if you get 100 to one leverage, you have to divide 20,000 by 100. So, that would be... So, 100 times 200 is 20,000. So you'd have to put down $200 in margin. Now, why does this all matter? I told you this was gonna be a little bit of a longer lesson. This all matters because
in your trading account, when you run out of margin, or when you've used all
of your down payment, when you've basically used up all of your down payment, your broker will close out, will do you a service and will close out all of your trades for you. So what I want to do here is I want to see if I can expand this upwards. There we go. This is great. I'm gonna walk through the numbers at the bottom of the screen and then I'm going to write out those numbers for you
in a separate window. You can see your account balance is here, your equity is here. Your account balance
is the amount of money that you had in your account before you opened any trades. Your equity is your account balance plus the gains minus the losses that are open in your account right now. Margin is the amount of money that the dealer is taking
out of your account and setting aside as the good faith down payment on the trades you take. And your free margin
is the amount of money that you have left over
to take more trades. And your margin level
is basically showing you the health and strength
of your trading account. This all matters for a
very important reason, and I'm gonna walk through all of these numbers specifically. I'm gonna need a brand new slide and I don't have one available in purple so we're gonna use the white background. Let's walk through these terms and I'll explain them one at a time. Your account balance
is the amount of money in your account before
you've opened any trades. So we're just gonna do before trades. Your equity, which is a
really important number, excuse me, apologize for that. I have to write more slowly or else everything goes wrong. Your equity in your trading account is your balance plus or minus open trades. So if you have a lot of
positive open trades, Nate, you have a higher
equity than balance. And if you closed everything, your balance would go up. And that would be fine. If you have no open trades, your balance is the same as your equity. If you have a bunch of
open negative trades, your balance is high and your equity is lower than your balance because if you closed everything, you'd have lost money. Equity's important. You don't wanna run out of equity. You don't wanna have a
bunch of open losing trades. Margin. What did we say the margin was, Nate? It is a... - [Nate] Down payment. - It's the down payment. And that's not money
available to you anymore. Your FX dealer keeps that down payment, sets it aside, and actually marks it at the bottom of your trading platform as the down payment that's no longer available to you. Now, it also has a number which is called free margin, or usable
margin is another word that people use for that term. So, we'll call it usable or free margin. Usable or free margin
is the amount of money that you can use for new trades. Number one. So that's the first thing it is. You can use your free
margin for new trades. Just like a real estate investor might have $100,000 to work with and they might have $10,000 out as a down payment on one property, and that means they
have how much left over for more down payments on more properties? - [Nate] 90,000. - $90,000. Okay, so you could take new trades with your free or usable margin. But that's not the only thing that your free or usable
margin is used for. It's used to cover losing trades. As your trades are losing and if you're not taking good trades and they're going the wrong way and you're losing money, you have less usable margin. Your account is falling. The value of your account is falling. So imagine that that real estate investor put $10,000 down on a property, has $90,000 in the bank, and then goes and blows $7,000-$10,000 on drugs. They don't have that money anymore and now they don't have as much money as they had before in free, usable down payment money. So your broker will use your usable and free margin to cover
open losing trades. The nice things is, also, that if you have a bunch of winning trades
in your trading account, your usable margin goes up. So you actually have
more money to play with. So, if the value of that real estate that that guy bought goes up by $50,000 he could borrow against that $50,000 and keep trading or
keep buying real estate. In other words, as you make good trading decisions and your account grows, either realized or unrealized, your usable margin goes up as well. There's a final number
inside of MetaTrader that we want to focus on before we wrap things
up, and that final number is called your margin level, and it's expressed as a percent of all of the numbers that we've talked about today. Most of you are going to use MetaTrader. This is the most important number. Every FX dealer in the world will close out all of your trades and give you what is called a margin call, which means basically they've said, "You've run out of usable margin," and they'll do that when your margin level hits a certain percent. And you need to ask your
FX dealer's representative what that level is in the trading account that you opened. Generally speaking, if
your trading account reaches a 30% margin level percent, you will get a margin call and all of your trades will be closed. They'll close all your trades out. You want to keep your margin level percent as high as possible so there's no risk of your trades being closed out. Over in this demo account over here my margin level percent is 859. You can't see it very well but that's what that number is. That means, Nate, I
have virtually no chance that this demonstration trading account is going to have a margin
call or any problem. This is the most important number that you can focus on, and the easiest way to keep this margin level percent high, and you want a high number, the easiest way to do that is, and now we come full circle on our conversation about trade size, is keep your trade size small. Trade micros and mini trade sizes. Don't trade standard lots. With a small trade size you'll never use very much margin. You'll never need very much leverage. Your free margin or usable margin will always stay high, and you'll never get a margin call. The last point I want to make is most traders blow up their trading account within 90 days. 90% of traders lose 90% of their money within 90 days. It's probably not exactly that number but that's pretty close. That's because they have big trade sizes in small trading accounts. If you have small trade
sizes in every account you will last past that 90-day mark. If you can last beyond the 90-day mark as a brand new trader and you have your original account
that you started with, the chances that you are
going to succeed go way up. I'm not gonna throw around promising statements
or anything like that, I'm not gonna make any promises, but the longer you can survive with small trade sizes, the better you can do. And the more likely it
is that you're gonna figure out what trading system you like while your trade sizes are small. And then as you do better and learn more, you can increase your trade sizes as your confidence and your account grow. I'm Rob Booker. Thanks for being here. I want to thank our sponsor Forest Park FX for sponsoring this video series. If you're interested in FX trading, contact Forest Park FX
to open a trading account and get cashback rebates on every single, every single? Every single trade you place. Contact Forest Park FX
at forestparkfx.com. Trading involves a
substantial risk of loss when you're trading forex. Terms and conditions will apply. I just like to say that. Will apply. And we'll see you in the next video.
