This article is for educational purposes only. Trading with leverage, margin, futures, or derivatives carries a high risk of rapid or total loss. This is not financial advice and should not be used to make trading decisions.
How Forex Lot Size and Leverage Work [Complete Guide]
When trading forex with leverage it is important to understand the difference between lot size and leverage to be able to choose the correct position size.
In Forex, lot size refers to the position size while leverage acts as a multiplier that can increase the lot size.
Experienced traders spend years learning how to balance position size and margin so they don’t expose their account to unnecessary risk.
In this article, we will take a closer look at the differences, how to choose lot size and multiplier, some examples, and some best practices.
Key takeaways
- Lot size in Forex refers to the volume of currency units in a trade, while leverage acts as a multiplier of your deposited trading capital, allowing you to control larger positions with less capital, which also increases loss potential and requires strict risk control.
- They are two distinct concepts that play different roles in determining the size of a trading position and the level of risk involved.
- Choosing ratio and lot size requires careful consideration of risk tolerance, understanding of the underlying market, trading strategy, stop-loss level, and margin requirement.
Lot size vs leverage in Forex explained
The difference between forex lot size and leverage is that lot size is a standardized quantity of currency units in a single trade and leverage is a multiplier of your margin requirement.
Position size and multiplier are two distinct concepts in forex trading that play different roles when it comes to determining the size of the position.
Margin lets you take positions that are larger than your deposit, but the pip value and potential loss rise in the same proportion.
The lposition has a direct impact on the trade size whereas a micro lot is worth less than a standard lot.
A multiplier on the other hand directly impacts your trading capital and increases the deposited amount depending on how much credit you choose.
With more margin available, your position size increases automatically, and so does the speed at which losses can occur.
What is a lot size in forex?
The lot size refers to the volume of any single trade in Forex where brokers offer different lot size options.
The different positions in Forex are:
- Standard lot: 100,000 units of the base currency
- Mini lot: 10,000 units of the base currency
- Micro lot 1,000 units of the base currency
- Nano lot 100 units of the base currency
A standard lot size of $100,000 in the EUR/USD forex pair means that the pip value is $10.
A mini lot size of $10,000 has a pip value of $1.
A micro lot size of $1000 has a pop value of $0,10.
A nano lot size of $100 has a pip value of $0,01.
Does leverage increase lot size and pip value?
Yes, it does increase position size because you can control more money and therefore trade with a larger position.
Let’s say that you have $5000 in your account and you choose a ratio of 1:100 then you will have $500,000, or 5 lots.
At a position of 5, the pip value is $50.
If you trade forex without margin, $5000 is only 5 micro lots where the pip value is worth $0,50.
Now, let’s assume you have $1000 in your account and you use a 1:10 ratio, then you reach the mini position at $10,000.
On small accounts, even low levels of leverage can create large swings in pip value, so it’s important to test different settings in a demo before risking money.
With a mini lot, each pip is worth $1.
How to choose them both
When professional traders choose position size and multiplier, these are the factors they consider first:
- Risk tolerance: Before choosing position size and credit you always want to assess your risk tolerance. How much money are you willing to lose on each trade and how much does that translate into pip value? Can you trade a standard position or is it better to trade a mini position based on your risk assessment?
- Underlying market: What market are you currently trading? Are there any news reports coming out soon that could throw off the market for you? Is the forex pair you are trading volatile and less liquid or is it moving slower with higher liquidity?
- Trading strategy: What high leverage trading plan are you going to use? Are you a break-out trader or are you waiting to catch mean reversion trades? Your strategy should decide how tight your stop needs to be. The lot size should follow your risk limit, not the leverage available.
- Stop loss level: If your stop loss distance is very far away you might need to choose a smaller position to reduce your risk and this can be done by lowering the leverage. Our stop loss calculator will help you calculate the distance to your stop loss if you are not sure how to do it on your own.
- Margin requirements: How much money are you going to deposit in your account? This matters because overlevering your account with a small amount of money can be very risky.
Things to consider before selecting your ratios
The most important things to consider when choosing which lot size to trade with and how much leverage to add are:
- Total loss
- Maximum profit
- Margin call and liquidation risks
In regards to loss, when trading Forex you need to understand how leverage affects losses before jumping into the markets with your own money.
When trading with high ratios you can lose more money than you have invested unless the broker you trade with has negative balance protection.
A higher ratio increases the risk for loss and adding too much buying power to your Forex trade could end badly.
Related: Forex risk management calculator
Leverage magnifies profit and loss at the same rate. Traders who use it well focus on avoiding downside first.
A small account can move fast when leverage is involved, but the same speed is what causes most accounts to disappear. The focus should always be capital survival, not high returns.
The major risk factors to your account as you choose position size and credit are the margin call risk and liquidation risk.
A margin call is a warning signal from your broker that you receive when your margin requirement has fallen below the minimum level.
If you don’t do anything when receiving the margin call and the market keeps going against you, your account might reach the point of liquidation.
Examples of trades with different levels
Let’s look at some examples of trades in the Forex market with different position sizes and multiplier ratios. For these examples, we’ll assume that you are trading with a balance of $10,000.
Example 1: Low ratios and standard lot size
- Leverage: 1:10
- Lot Size: 1 Standard Lot = 100,000 units
In this example, the trader is using low ratios and a standard position to execute a trade on the EUR/USD currency pair at an exchange rate of 1.2000.
Trade: Buy 1 standard position in EUR/USD at 1.2000
- Trade size: 100,000 EUR
- Margin required (1%): 100,000 EUR * 1.2000 / 10 = $12,000 (using 1% of the trade size as margin)
- Pip value: $10 (approximate, assuming USD as the account currency)
- Risk per pip: $10 (with a stop-loss of 100 pips, the potential loss is $10 * 100 = $1,000)
Example 2: Moderate multiplier and mini postion size
- Leverage: 1:50
- Lot size: 1 Mini lot = 10,000 units
Trade: Sell 1 mini lot in USD/JPY at 110.50
- Trade size: 10,000 USD
- Margin required (2%): 10,000 USD / 50 = $200 (using 2% of the trade size as margin)
- Pip value: $1 (approximate, assuming USD as the account currency)
- Risk per pip: $1 (with a stop-loss of 50 pips, the potential loss is $1 * 50 = $50)
Example 3: High margin and micro position size
- Leverage: 1:200
- Lot size: 1 Micro lot = 1,000 units
Trade: Buy 1 Micro lot in GBP/CHF at 1.3000
- Trade size: 1,000 GBP
- Margin required (0.5%): 1,000 GBP / 200 = $5 (using 0.5% of the trade size as margin)
- Pip value: $0.10 (approximate, assuming USD as the account currency and GBP/USD exchange rate at 1.3000)
- Risk per pip: $0.10 (with a stop-loss of 30 pips, the potential loss is $0.10 * 30 = $3)
FAQ
Does leverage increase lot size?
Yes, it linearly increases position size. For example, if you choose a 1:10 multiplier, your position size is increased 10 times.
How much leverage is 0.01 lot size?
Multiplier and position size is not the same thing. However, you can reach a 0.01 lot size by using margin when trading Forex.
Is leverage the same as lot size?
No, it is not the same as position size. The main difference is that position size is the quantity of units for a Forex trade and credit is the multiplier of your trading capital.
Conclusion
Understanding how lot size and leverage interact is essential if you want to avoid wiping out your account quickly.
Position size represents the quantity of units while credit is the multiplier of your account capital.
Some of the best practices to follow before choosing position size are risk management techniques, assessing the market volatility, choosing a trading strategy, and calculating your multiplier.
By starting with a demo account in Forex, you can practice all these things without running the risk of losing your own money, which is highly used by experienced traders.
Anton Palovaara
This article is published under Leverage.Trading’s Risk-First Education Framework, an independent learning system built to help traders quantify and manage risk before trading.
