# Lesson 8: Pip Value & Margin

**Margin **

You will need a certain amount of money to

open a trade. This is known as margin. The margin is not a price, but

an amount of money that is frozen once you open an account and is returned to

you once the transaction has been closed. It is important to know what the size

of the margin will be, so that you can determine not only the risk itself, but

also calculate whether the remaining funds will allow you to open additional

positions.

Note, with CFDs, you only need a fraction

of the nominal value to be able to open the spot. For example, with a 30:1

leverage, you would only need 3.33 per cent of the nominal value for the

transaction margin. Typical leverage for FX is 1 to 30, which means that you

would only need 3.33 per cent of the nominal value of the margin. It helps you

to potentially generate a higher return on the capital invested, but also

increases the risk, which means that you may need to deposit additional funds

to cover your position. If the place moves against you, you will also incur

greater losses.

Let’s assume that you would like to open a

1 lot trade on GBP / USD with a leverage of 30:1, but you don’t know what the

nominal value per lot is for this instrument. This information can be found in

the specification table of the instrument.

In GBP / USD, the nominal value of the lot

is £ 100,000. If the leverage is 30:1, you will only need 3.33% for the

margin of this exchange, which is measured in the base currency of the pair.

Therefore, you need £ 3,333.33 for a 1 lot payment margin.

From the point of view of risk management,

margin is very relevant and the general notion is that traders should not enter

transactions with a margin of more than 30% of the total invested capital.

Returning to the example above, if your

initial capital is £ 5,000 and you would like to make a 1 lot deal, that would

reflect 66.67% of your total capital, because the appropriate 30:1 leverage

margin would be £ 3,333.33.

**Pip Value**

The second variable that determines the

size of the volume is the pip value. It is very important to know the pip value

in the investment phase, particularly for risk management purposes. You will

know how the portfolio will be impacted if the market goes 100 pips to your

favor, or 100 pips to you.

You can use the instrument description

table again to measure the pip value.

In order to calculate the pip price of 1

lot, you multiply the “Nominal Price of one lot” by the “Price

of one PIP” and the value will be in the quoted currency:

*100000 x 0.0001= 10 USD *

It means that if you open a 1 lot exchange

for GBP / USD and the market shifts 100 pips to your benefit, you will make a

profit of $1,000 (10 USD x 100 pips). On the other hand, if the market does not

shift to your favor, you would have a loss of $1,000. This estimate will help

you determine at which market rate your total agreed loss may be, and where you

may be able to assign a Stop Loss order.

The general idea is that you should not be

in a position to lose more than 5% of your total capital. The explanation for

this is that trading is based on probability, and you should give your plan a

chance to evaluate whether you are more likely to achieve victory than loss.

You open a 1 lot payment for GBP / USD with

a pipe price of £ 10. You will also follow the rule that you do not allow a

loss of more than 5% of your total capital. As a result, your total capital is

£ 5,000, and your maximum agreed loss is £ 250, which is roughly $380.

When you know that 1 pip is worth $10 and

your maximum agreed loss is up to $380, then by multiplying $380 by 10, your

maximum Stop Loss rate is 38 pips.

**Manage the risk properly**

As shown above, both pip price and margin

play an important role in trading. Choosing the correct size of your trading

position is a vital part of trading, as it can make it easier or more difficult

to handle your position after a trade has been opened. In addition, the pip

value and the margin are also significant from a risk point of view. If your

trade is too high, a small move could take you out of it. That’s why both of

them need to be understood to help you trade wisely and potentially increase

your chances of good trading.

- INTRODUCTION TO FINANCIAL MARKETS
- BASICS OF TRADING
- TRADING PLATFORM