The Effect of Leverage On Pip Value
Standard forex accounts have defined lot and pip units. Lot is the minimum number of shares or pairs that you can trade. While Pip is the smallest amount where the currency quotation can change.
Typically, one lot is worth $ 100,000 and pip units are expressed as $ 0.0001 for the associated US dollar pairs. This is the most common pip unit and is used for almost all currency pairs. The pip value is the effect of a one-pip change to the dollar amount. It is important to note that the pip value does not differ based on the amount of leverage used, but the amount of leverage you own affects the pip value.
Leverage is the amount of money you can spend on borrowed capital investment. Basically, the greater your leverage, the more risky your position will be – a decrease in some points can mean losing all the money in your account. For example, with a standard lot size of $ 100,000, the pip value is $ 10 (from a calculation of $ 100,000 x 0.0001). If your account contains $ 10,000 and you have 150: 1 leverage, then you will have $ 1.5 million (from calculation of $ 10,000 x 150) or 15 lots (from a calculation of $ 15,000,000 / $ 100,000) that you can use for investation. It would be very risky to use the entire $ 1.5 million you own because each pip is worth $ 150 and you can empty your account with just a loss of 67 pips ($ 10,000 / 150). Although there is a big downside risk to having high leverage, there are also great side benefits – if you make 67 pips, your account will double, and you’ll earn 100% in one day!
Increasing your leverage increases the volatility of your position because a small change in the pip value will result in greater fluctuations in your account value. Wisely determine your leverage.