It is appropriate to begin this presentation with an extended citation from Luther, where this founder of ‘Protestant thought’ develops what he means by ‘justification by faith’. We read in the Large Commentary to the Galatians:

Faith lays hold upon Christ and has Him present, enclosing Him as the ring encloses the precious stone which is set in it. And he who is found to have laid hold upon Christ with such a faith and have Him in his heart, God counts for righteous. This is the reason or the merit through which we receive the forgiveness of sins and righteousness. Because you believe in Me, says God, and because your faith lays hold upon Christ, whom I have given to you to be your Justifier and Saviour, therefore be thou righteous… And it is altogether necessary that God accepts us or counts us as righteous, first because we are not yet in this life wholly righteous, rather in this life sin always remains in the flesh. This sin remaining in the flesh God purges from us. Further we are also sometimes abandoned by the Holy Spirit and fall into sin, like Peter, David and other saints. But then we may always fall back upon this doctrine, that our sins are covered and that God will not impute them unto us (Rom. 4.7f).