FOREX TRADING- The Basics Explained in Simple Terms ( PDFDrive.com )

Chapter 3
How Do You Actually Trade Forex?
It may seem a little confusing at first but really, it is quite simple.
Forex is a leveraged financial instrument, as is Options, Futures, CFDs, Warrants
etc. So this is nothing new.
You trade Forex in 'lots'. That is basically the industry standard, but there are
brokers out there that do things slightly different. For example, Oanda trades in
'units', but they can be easily converted to a lot size equivalent.
Lots are known by different names, depending on how much currency they
represent. There is a standard lot, a mini lot and a micro lot:
One standard lot
100,000 units of the base currency and is normally expressed as 1.0 lot
One mini lot
10,000 units of the base currency and is normally expressed as 0.1 lot
One micro lot
1,000 units of the base currency and is normally expressed as 0.01 lot
How many lots you can buy or sell depends on a few things:
▪ your account balance
▪ your nominated trading leverage, and
▪ how much you are willing to risk on the trade
This is when I mention the words 'margin', 'leverage' and 'risk'. All words that are
important, but there is no need to get stressed about them as they can all be
controlled and I'll show you an easy way to stay out of trouble.
Margin refers to the money you have in your account that is available to trade with.
As stated earlier, Forex is a leveraged instrument, so if your broker offers you
100:1 leverage, then for every 1 unit you have in your trading account, you can
control 100 units in a trade. Some brokers offer up to 1000:1 leverage. If you are
over leveraged and a trade goes against you, and you decide not to take any action,
your broker will close the trade on your behalf to protect their interests, even
though you may have blown your account out. The higher the leverage, the more
currencies you can control (buy or sell more). It is not something that concerns me
as my risk is controlled on all trades. Risk refers to what you are willing to risk on
any particular trade, in terms of dollars.