Why you must learn these four words first
Almost every beginner loss comes from not understanding the numbers behind a trade. You click "buy", the price moves a little, and suddenly the balance changes by far more than expected. The reason is usually lot size and leverage. This guide gives you the formulas and some worked examples. All prices below are invented to show the arithmetic and are not predictions or real quotes.
What is a pip?
A pip is the standard small unit of price movement. For most currency pairs, a pip is the fourth decimal place: 0.0001. If EUR/USD moves from 1.1000 to 1.1001, that is one pip. For pairs that include the Japanese yen, a pip is the second decimal place: 0.01. Many platforms also show a fifth decimal place (a pipette, one tenth of a pip).
Gold and indices do not use pips in the same way. Gold is usually quoted in dollars per ounce, and traders speak of "points" or "dollars". Check the contract specification in your terminal. See also our gold trading guide.
What is a lot?
A lot is the size of your trade. In forex, the usual sizes are:
| Name | Size (base currency) | Pip value on EUR/USD (approx.) |
|---|---|---|
| Standard lot (1.00) | 100,000 units | 10 USD |
| Mini lot (0.10) | 10,000 units | 1 USD |
| Micro lot (0.01) | 1,000 units | 0.10 USD |
Brokers may allow different minimum lot sizes, and account types such as cent accounts show the balance in cents. Always check your own account specification. The key point is that the same price move produces ten times more profit or loss on 1.00 lot than on 0.10 lot.
Pip value: how much does one pip cost you?
For a pair where the account currency is the quote currency (for example EUR/USD with a USD account), the pip value is easy:
pip value = lot size in units x pip size
Example: 0.50 lot is 50,000 units. 50,000 x 0.0001 = 5 USD per pip. If the price moves 20 pips against you, the loss is 20 x 5 = 100 USD, before costs. For other pairs, the pip value is converted into your account currency, and your platform usually shows it. Use a position size calculator before every trade until the formula is automatic.
What is leverage?
Leverage is a ratio that shows how large a position you can open compared with your own money. A ratio of 1:100 means that for every 1 unit of your money, you can control 100 units. It is not a loan that grows your account. It reduces the deposit needed to open a position, and it increases the effect of every price move on your balance.
Brokers set maximum leverage by account type, instrument and country. Some regulators limit retail leverage strongly, while offshore brokers may offer much higher ratios. Higher leverage is not a benefit for a beginner. It is the main tool by which small accounts are destroyed.
What is margin?
Margin is the part of your balance that the broker sets aside while a position is open. It is not a fee, and it returns to your free funds when you close the trade.
required margin = position value / leverage
Example. You buy 0.10 lot of EUR/USD at 1.1000. The position is 10,000 units, worth about 11,000 USD. With 1:100 leverage the margin is 11,000 / 100 = 110 USD. With 1:500 it would be 22 USD. The risk does not change: a 50 pip move still equals about 50 USD in both cases. Higher leverage only lets you open larger positions with less margin, which is exactly why it can lead to overtrading.
Equity, free margin and margin level
- Balance: your money without open trades.
- Equity: balance plus or minus the floating profit or loss of open trades.
- Used margin: the amount currently held for open positions.
- Free margin: equity minus used margin. This is what you can use to open new trades and to absorb losses.
- Margin level: equity / used margin x 100%.
Margin call and stop out
When your losses grow, equity falls and so does the margin level. Brokers set two thresholds. At the first, called a margin call, you receive a warning and cannot open new positions. At the second, the stop-out level, the broker starts closing your positions automatically, usually the losing one first. The actual percentages differ between brokers and account types, so read them in your account terms.
Example. You have a 500 USD balance and open 1.00 lot of EUR/USD (position value 110,000 USD) using 1:500 leverage. The required margin is 220 USD. Each pip is worth 10 USD. If the price goes 25 pips against you, the loss is 250 USD, so equity falls to 250 USD and the margin level is 250 / 220 = about 114%. A few more pips and you will be near the stop-out level. A market gap over a weekend or news can make it even faster. This is how a full account disappears within minutes.
How to size a position in practice
- Decide how much you accept to lose on this trade, for example 1% of your balance. On 1,000 USD that is 10 USD.
- Decide where your stop-loss will be, based on the chart and not on the money. Say it is 20 pips away.
- Divide: 10 USD / 20 pips = 0.50 USD per pip, which is about 0.05 lot on EUR/USD.
- Check that the margin is small compared with your free funds.
This process is described further in risk management. Whatever leverage your broker allows, your own risk per trade is what protects you.
Pip and lot values on other instruments
The formulas change a little outside EUR/USD. For USD/JPY the pip is 0.01, and the pip value is first calculated in yen and then converted into your account currency by your platform. For gold, one lot is often 100 ounces, and for an index the value per point depends on the contract. Cryptocurrency CFDs have their own contract sizes. The safe habit is to open the instrument specification in your terminal and read three items: contract size, minimum and step of the lot, and margin requirement. Then test the numbers with the smallest possible lot on a demo account before using a real one.
Effective leverage: the number that really matters
The leverage ratio on your account is only a limit. The number that counts is your effective leverage, which is the total value of your open positions divided by your equity. If your equity is 1,000 USD and you hold 0.10 lot of EUR/USD (about 11,000 USD of value, using an example price), your effective leverage is about 11:1, even if the account allows 1:500. Holding 1.00 lot on the same equity gives about 110:1. Many experienced traders keep effective leverage low, because high effective leverage means a small market move is enough to cause a margin call.
Common mistakes with lots and margin
- Typing 1 instead of 0.01 in the volume box. Always check the lot field before you click.
- Using all free margin because the platform allows it.
- Forgetting that a trade on a different pair has a different pip value.
- Ignoring the cost of the spread, which is lost the moment the trade opens.
- Holding trades over major news when margin is thin.
To compare these costs between account types, see spread, commission and swap.
Practise lot sizes on an Exness demo account
Risk warning
The examples above are simple arithmetic with invented prices, not advice or forecasts. Forex and CFDs carry a high risk of loss, leverage can magnify losses beyond your expectations, and most retail traders lose money. Trade only with money you can afford to lose entirely, and only if you are 18 or older. Check the exact contract size and margin rules in your own account.