Lot Sizes, Margin & Leverage — The Position Sizing Trinity 📊

In Forex, you don't buy/sell single currency units. You trade in standardized blocks called Lots.

What is a Lot?

Lot = A standardized unit representing a specific number of units of the BASE CURRENCY

The Four Lot Sizes

How Lot Size Affects Profit/Loss

Scenario: EUR/USD moves 100 pips in your favor

Same 100-pip move, 1,000x difference based on lot size!

Key Takeaways

Choose Based on Account Size:

• $100-$500 account → 0.01 Micro Lot MAX
• $500-$2,000 account → 0.01-0.05 lots
• $5,000-$10,000 account → 0.10 Mini Lot typical
• $50,000+ account → 1.00 Standard Lot acceptable

Start Small:

• Beginners: Always start with 0.01 Micro Lot
• Prove profitability for 3+ months before scaling

Leverage = Borrowed capital from your broker that allows you to control a position much larger than your account balance.

Understanding the Leverage Ratio

Leverage is expressed as a ratio:

50:1 leverage = For every $1 of your capital, control $50
100:1 leverage = Control $100 per $1
500:1 leverage = Control $500 per $1

How Leverage Works

Example: Opening 1.00 Standard Lot EUR/USD

Position Details:

• Pair: EUR/USD at 1.0850
• Lot size: 1.00 (100,000 EUR)
• Total position value: $108,500

Without Leverage:

• You'd need $108,500 in your account
• Impossible for most retail traders

With 100:1 Leverage:

• Required capital: $108,500 ÷ 100 = $1,085

With 500:1 Leverage:

• Required capital: $108,500 ÷ 500 = $217

The Double-Edged Sword 🗡️

Leverage amplifies BOTH profits AND losses equally.

Scenario: $5,000 Account, 1.00 Standard Lot, 100 pips move

If price moves 100 pips in your favor:

Profit = 100 pips × $10/pip = $1,000
Return = 20% gain

If price moves 100 pips AGAINST you:

Loss = 100 pips × $10/pip = $1,000
Return = -20% loss

With 500 pips against you:

Loss = 500 pips × $10/pip = $5,000
Account completely wiped out (100% loss)

The Leverage Paradox

High Leverage is NOT inherently bad—it's MISUSE that kills accounts.

Professional Use:

• Broker offers: 500:1
• Actual usage: 5:1 to 10:1 (Real Leverage)
• Why: Flexibility without obligation

Amateur Misuse:

• Broker offers: 500:1
• Actual usage: 200:1+ (Real Leverage)
• Result: Account destruction on normal volatility

Margin = The amount of your account equity held as collateral to open and maintain leveraged positions.

Critical Clarification: Margin is NOT a fee or cost. It's a deposit (gets returned when you close the position).

Margin Terminology

Required Margin

Definition: The minimum capital needed to open a specific trade

Formula:

Required Margin = Position Value ÷ Leverage Ratio

Example:

Position Value = $108,500 (1.00 lot EUR/USD)
Leverage = 100:1
Required Margin = $108,500 ÷ 100 = $1,085

Used Margin

Definition: Total margin currently tied up in ALL open positions

Free Margin

Definition: Equity NOT currently used as margin

Formula:

Free Margin = Equity - Used Margin

Margin Level

Definition: A percentage indicating account health

Formula:

Margin Level = (Equity ÷ Used Margin) × 100

Interpretation:

Margin Call vs. Stop Out

Margin Call (Warning):

• Trigger: Margin Level = 100%
• You CANNOT open new positions
• Existing positions remain open
• Your Options: Deposit funds or close positions

Stop Out (Execution):

• Trigger: Margin Level = 50%
• Broker automatically closes positions
• Starts with most losing position
• You have NO control (automatic)

Lot Size + Leverage + Margin form an interconnected system.

Real-World Comparison

Account: $10,000, Leverage: 100:1, Trade: EUR/USD at 1.0850

Scenario A: Conservative (0.10 Mini Lot)

Position Value = $10,850
Required Margin = $108.50
Free Margin = $9,891.50
Margin Level = 9,217%

Pip Value = $1.00/pip
100-pip move = $100 (1% account)

Safety: EXCELLENT (virtually no Stop Out risk)

Scenario B: Moderate (1.00 Standard Lot)

Position Value = $108,500
Required Margin = $1,085
Free Margin = $8,915
Margin Level = 922%

Pip Value = $10.00/pip
100-pip move = $1,000 (10% account)

Safety: GOOD (low Stop Out risk)

Scenario C: Aggressive (5.00 Lots)

Position Value = $542,500
Required Margin = $5,425
Free Margin = $4,575
Margin Level = 184%

Pip Value = $50.00/pip
100-pip move = $5,000 (50% account)
200-pip move = $10,000 (100% wipeout)

Safety: DANGEROUS (Stop Out risk with 200-pip move)

Real Leverage vs. Available Leverage

Available Leverage: What broker offers (100:1, 500:1)

Real Leverage: What you ACTUALLY use

Formula:

Real Leverage = Total Position Value ÷ Account Equity

Professional Target: 3:1 to 10:1 MAX

Impact Table:

Summary

Safe Position Sizing:

• 1% risk per trade
• Real Leverage ≤ 10:1
• Margin Level ≥ 500%

Frequently Asked Questions

Q1: What is the ideal lot size for a beginner?

The Micro Lot (0.01) is MANDATORY for beginners.

Why:

• Minimal risk: $0.10/pip vs. $10/pip
• Psychological training (real money, small consequences)
• Strategy validation (test with minimal capital)
• Account preservation (survive 100-pip drawdown)

Graduation Path:

• Months 1-3: 0.01 Micro only
• Months 4-6: 0.01-0.03 (if profitable)
• Months 7-12: 0.05-0.10 Mini (if consistently profitable)

Q2: What is 'Real Leverage' and why is it important?

Real Leverage = The ACTUAL leverage you're using

Formula:

Real Leverage = Total Position Value ÷ Account Equity

Example:

Account: $10,000
Position: 1.00 lot EUR/USD = $108,500
Real Leverage = $108,500 ÷ $10,000 = 10.85:1

Professional Target: 3:1 to 10:1 MAX

Why It Matters:

• 10:1 real leverage + 10% market move = 100% account loss
• 5:1 + 10% move = 50% loss (recoverable)

Quiz

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Proceed to Lesson 8: Forex Market Structure — Who Trades Forex?