Ask a new FX trader how big their last trade was and you will often hear a number of lots. Ask how much of their account was actually at risk and the answer gets vaguer. Lots, leverage and margin are three separate ideas that brokers' platforms tend to blur together, and confusing them is one of the fastest ways to take on far more exposure than you intended. This guide separates them cleanly.
Lots: the unit of trade size
Spot FX is traded in units of the base currency (the first currency in the pair). Lots are just convenient bundles of those units:
| Lot type | Units of base currency | Approx. pip value on EUR/USD (USD account) |
|---|---|---|
| Standard | 100,000 | $10.00 |
| Mini | 10,000 | $1.00 |
| Micro | 1,000 | $0.10 |
So "0.25 lots" on most platforms means 25,000 units. Many brokers also let you enter units directly, which is often clearer. If the pip-value column is new to you, start with our primer on pip value. It is the bridge between trade size and dollars gained or lost.
The key point: lot size, combined with how far price moves against you, determines your loss. Not leverage, and not margin. A 1-lot EUR/USD position that moves 50 pips against you loses roughly $500 whether your broker offers 10:1 or 500:1.
Notional value: what you actually control
Notional value is the full market value of the position. For EUR/USD it is the number of units multiplied by the exchange rate.
Illustrative example: buying 10,000 EUR/USD at 1.1000 gives a notional value of 10,000 x 1.1000 = $11,000. Your profit or loss is calculated on that full $11,000, even though you did not put up $11,000.
This is the number most beginners never look at. A trader with a $2,000 account holding 1 standard lot of EUR/USD controls about $110,000 of currency, more than 50 times their equity. A 1% move in the pair (about 110 pips at that price) wipes out more than half the account.
Leverage: the ratio between notional and equity
Leverage is simply notional value divided by the money backing it. There are two ways to think about it, and only one of them matters for risk:
- Maximum leverage is what the broker permits: 30:1, 50:1, or in some offshore jurisdictions much more. It is a ceiling, not a recommendation.
- Effective leverage is what you are actually using: total notional of open positions divided by account equity. This is the number that tells you how sensitive your account is to price moves.
Illustrative example: a $10,000 account holding 20,000 units of EUR/USD at 1.1000 has a notional of $22,000 and an effective leverage of 2.2:1. The same account holding 300,000 units has a notional of $330,000 and an effective leverage of 33:1. The broker's maximum is identical in both cases; the risk is not remotely similar.
Leverage limits vary by jurisdiction. In Canada, margin requirements for retail FX are set by the industry regulator (CIRO) and by dealers, and they are considerably stricter than the very high ratios advertised by offshore firms. Whatever your broker allows, effective leverage is the number to watch.
Margin: the deposit, not the cost
Margin is the portion of your equity the broker sets aside as a good-faith deposit while a position is open. It is not a fee and it is not your maximum loss. It is expressed as a percentage of notional, and it is just leverage viewed from the other side:
- 50:1 leverage = 2% margin
- 30:1 leverage = about 3.33% margin
- 20:1 leverage = 5% margin
Illustrative example: with a 2% requirement, the $11,000 notional position above needs $220 of margin. Your account still bears every dollar of P&L on the full $11,000.
Platforms usually show four related numbers:
- Balance: cash in the account, excluding open-trade P&L.
- Equity: balance plus or minus floating P&L on open trades.
- Used margin: the total deposit currently locked up by open positions.
- Free margin: equity minus used margin, i.e. what is available for new positions or to absorb losses.
Many platforms also show a margin level: equity divided by used margin, times 100. If equity is $3,000 and used margin is $1,000, margin level is 300%.
Margin calls and stop-outs
As losses grow, equity falls while used margin stays the same, so margin level drops. Each broker sets two thresholds:
- A margin call level, where you are warned (and often blocked from opening new trades).
- A stop-out level, where the broker starts closing your positions automatically, usually the largest loser first, at whatever price is available.
The exact percentages differ between brokers, so read your own firm's margin policy rather than assuming. The practical lesson is the same everywhere: a stop-out is a stop-loss you did not choose, executed at a time you did not pick, often during fast markets when spreads are wide. If your risk plan relies on the stop-out to protect you, you do not have a risk plan.
Why "low margin" feels safe but is not
A common trap: a trader sees that a position uses only $220 of margin on a $5,000 account and concludes they are risking very little. Margin used tells you almost nothing about risk. What matters is:
- The size of the position (units or lots).
- The distance to your planned exit if wrong (your stop, in pips).
- The pip value at that size.
Multiply those together and you have your planned loss. That is the number to compare with your account, a topic we cover in detail in position sizing and risk per trade.
Overnight positions and financing
Leverage also has a carrying cost. Positions held past the daily rollover (typically 5pm New York time) are charged or credited a financing amount, often called swap or rollover. It is based largely on the interest-rate difference between the two currencies, plus a broker markup. On a large notional position held for weeks, this can be meaningful. Your platform will show the current swap rates per pair; check them before planning a longer-term hold.
A quick pre-trade checklist
- What is the notional value of this trade, in my account currency?
- What will my effective leverage be across all open positions after I add it?
- Where is my stop, and what is the dollar loss if it is hit at that size?
- How far could price gap past my stop on a news event or the weekly open, and could I live with that?
- How much free margin will remain, and how far is my margin level from the broker's stop-out?
If you can answer those five questions before every trade, you understand lots, leverage and margin better than most retail traders, and you are far less likely to be surprised by your own account statement.
This article is general education, not investment advice. Leveraged FX trading carries a high risk of loss. All figures are illustrative.