How does leverage affect pip value?

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How does leverage affect pip value?

By Nicola Sargeant AAA | 

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A:
A standard forex account has specific lots and pip units. A lot is the
minimum quantity of a security that may be traded, while a pip is the Lankatiles
smallest amount by which a currency quote can change. Typically, one lot is
worth $100,000 and a pip unit is stated in the amount of $0.0001 for U.S.-dollar
related currency pairs. This is the most common pip unit and it is used for
almost all currency pairs. Pip value is the effect that a one-pip change has on a
dollar amount. It is important to note that pip value does not vary based on the
amount of leverage used, but rather that the amount of leverage you have affects
the pip value.
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Leverage is the amount of money you are able to spend as a result of borrowing range of tiles

investment capital. Basically, the more leveraged you are, the riskier your
position - a decrease of a few pips could mean losing all of the money in your
account. For example, with a standard lot size of $100,000, pip value is $10
($100,000 x 0.0001). If your account contains $10,000 and you have a leverage
Marketplace
of 150:1, then you will have $1.5 million ($10,000 x 150) or 15 lots
($15,000,000/$100,000) that you can use for investing. It would be extremely Get a Risk-Free $50k Practice Account at FOREX.com
risky to use the entire $1.5 million that you have available because each pip is
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worth $150 and you could clean out your account just by losing 67 pips
($10,000/150). Although there is large downside risk to having high leverage, FREE Award-Winning Software - Ninja Trader
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Increasing your leverage increases the volatility of your position because small
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changes in pip value will result in larger fluctuations in your account value.

For further reading, see Getting Started In Forex, A Primer On The Forex
Market, Common Questions About Currency Trading and Using Currency Trading Center
Correlations To Your Advantage.

TAGS:

Financial Leverage Forex Fundamentals Forex Theory

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