Understanding Lot Sizes, Leverage, and Margin in Forex

A standard lot in forex is 100,000 units of the base currency. A mini lot is 10,000 units, a micro lot is 1,000 units. If you buy 1 standard lot of EUR/USD, you are effectively buying €100,000 and simultaneously selling the equivalent in US dollars — the lot size determines how much a given pip move is worth in your account currency, which is exactly why position sizing starts with choosing a lot size, not the other way around. Leverage is what lets a trader control a position far larger than the cash actually deposited. 1:100 leverage means $1,000 of account equity can control a $100,000 position. Leverage is not free money — it doesn't change the pip value or the risk of the position itself, it only changes how little of your own capital you need to open it. Higher leverage means a smaller adverse move can wipe out a larger percentage of the deposited capital, because the position size relative to equity is larger. Margin is the amount of account equity a broker sets aside — effectively locks — while a leveraged position is open, calculated from the position size and the leverage ratio. Free margin is what's left over and available to open new positions or absorb floating losses. When floating losses eat through free margin far enough, a broker issues a margin call, and if losses continue past that, a stop-out — the broker automatically closes positions to prevent the account balance from going negative. Put together: lot size determines how much a price move is worth, leverage determines how much of your own capital that position size actually requires, and margin is the running tally of capital committed versus capital still available. Every one of these numbers should be understood in dollar terms before a strategy — automated or manual — is ever run with real money.