Lot Size, Leverage, and Margin

What is a LOT in Forex?

As you may know, currency value changes are measured in pips, which represent a very small percentage of a currency unit.

To profit from these small changes, you need to trade large amounts of a currency to see a significant gain or loss.

For example, using a 100,000-unit lot:

• USD/JPY at an exchange rate of 119.80:
  (0.01 / 119.80) × 100,000 = $8.34 per pip

• USD/CHF at an exchange rate of 1.4555:
  (0.0001 / 1.4555) × 100,000 = $6.87 per pip

Depending on the currency you trade, the pip value will vary.

What is Leverage in Forex?

Leverage allows you to trade more currency units than you actually own.

Imagine you have an account with $1,000. You enter a trade with $100, and your broker offers a 100:1 leverage, meaning you can hold a position up to $10,000. For every $1 you invest, the broker adds $99, making a total of $100.

Important to remember: leverage does not affect the lot size.

• A mini lot is always 10,000 units.

• A standard lot is always 100,000 units.

The term "leverage" comes from the idea of lifting a very heavy object. Some things are too heavy to lift alone, but with the right leverage, it becomes easy.

With 100:1 leverage, you can trade a mini lot (10,000 units) using only 100 of your own units.

What is Margin?

Margin is a good faith deposit required by your broker to cover the position you open in the market. Without this margin, you cannot use the leverage offered by your broker.

Brokers use this margin to maintain your position and cover potential losses.

Different brokers offer different margin levels depending on factors like:

• The currency pair you trade

• The leverage on your account

Each currency pair moves differently. More volatile pairs usually require a higher margin.

Margin is usually expressed as a percentage, such as 0.25%, 0.50%, or 1%. Lower leverage requires a higher margin.

A simple way to think about margin: it represents 1 part of the leverage ratio. For example, with 100:1 leverage, the margin required is 1% of the trade size.

• If you open a $10,000 trade in a mini account with 100:1 leverage, you only need $100 in your account to open the trade.