Lots, units and leverage explained

Three ideas decide how much a forex trade can make or lose: how big the position is, how much money the broker sets aside for it, and how far the price moves. Lots, margin and leverage describe the first two. They are often confused, and the confusion is expensive.

Lots and units

Forex positions are measured in units of the base currency (the first currency in the pair). Because the numbers get large, most platforms use lots:

• Standard lot: 1.00 lot = 100,000 units
• Mini lot: 0.10 lot = 10,000 units
• Micro lot: 0.01 lot = 1,000 units

So 0.25 lots of EUR/USD is 25,000 euros bought or sold against the dollar. Some brokers use different contract sizes for certain products, so check the specification for the instrument you are looking at.

Notional value

The notional value is the full size of the position in money. One standard lot of EUR/USD at 1.0850 controls 100,000 euros, which is worth $108,500. Your profit or loss comes from the movement of that whole amount, not from the deposit you put up.

Margin

Margin is the deposit the broker holds while the position is open. It is a fraction of the notional value. It is not a fee, and it is not a cap on what you can lose.

Leverage

Leverage is the ratio between the position size and the margin. At 1:30, every $1 of margin supports $30 of position. Regulators in several regions cap leverage for retail traders, for example at 30:1 on major pairs in the EU and UK and 50:1 in the US.

1 lot EUR/USD at 1.0850 = $108,500 notional
Margin at 1:30 = 108,500 ÷ 30 = $3,616.67
Margin at 1:100 = 108,500 ÷ 100 = $1,085.00

Here is the key point: leverage changes the margin, not the risk. In both cases above the position is the same size, so a 50-pip move costs the same $500. Higher leverage only means less money is set aside, which makes it easier to open a position that is too large for the account.

How leverage magnifies a move

A 1% move in EUR/USD is about 108 pips from 1.0850. On one standard lot that is roughly $1,085. If the account holds $5,000, a 1% move in the market is a 21.7% change in the account. The market did not become more volatile; the position was simply large relative to the money behind it.

Margin calls and stop-outs

As losses grow, your equity falls. Brokers compare equity with used margin as a percentage, the margin level. If it drops to the broker's threshold you get a margin call, and at a lower threshold the broker may close positions automatically, a stop-out. Thresholds vary by broker.

A sensible way to think about it

1. Decide where the stop loss goes and how much money you are prepared to lose if it is hit.
2. Work out the lot size from those two numbers (the position size calculator does this).
3. Only then look at margin, to check you have enough free margin left for the trade and for any losses.

Doing it in that order keeps the available leverage from deciding your position size. The practice simulator shows margin, free margin and margin level for every trade, and lets you change leverage at the start of a session to see that the dollar risk stays the same.

Education, not advice. This note explains a concept with illustrative numbers. It is not a recommendation to trade. Currency trading carries risk, and losses can exceed expectations. See the risk disclaimer.