What are “lots” in forex?
Initially, banks and brokerage companies used forex trading as a hedging tool to safeguard their investments and day trading operations. But as more people have access to foreign currency without limits, the popularity of Forex has surged tremendously in recent years.
Forex is a global financial market where traders buy and sell currencies. Forex trading is different from investing in stocks because there are no products involved, but an individual might be betting on the future value of one currency.
This type of trading is a form of the foreign exchange market where investors buy and sell one currency against another. The value is determined by the supply and demand of different currencies in the market
A “lot” in forex trading is a unit of measurement that standardises trade size. Forex trading is a lot’s unit of measurement. A lot is a very important currency unit that standardizes and breaks down an amount of a particular asset. A lot is defined as a 100,000 units of foreign currency.
In forex, 0.01 is a micro lot, which equals 1,000 units of currency.
Based on the EUR/USD, a pip is worth about $0.10 for a micro-lot.
Based on the EUR/USD, the pip is worth about $10 per lot.
What are forex lots?
In FX trading, transactions are made with four different standard currencies – the standard, micro, mini, and nano. These smaller currencies can be worth a lot or a little depending on the value of the larger currency they’re interested in.
Standard Lot:
In Forex, a standard lot is 100,000 units. It’s the common unit size for independent and institutional traders alike. This is also the most commonly traded currency in the market.
For example, one standard lot of the base currency (EUR) would be 130,000 units if the EUR/USD conversion rate was $1.3000. This means that to buy 100,000 units of EUR at the current price, you’d need 130,000 units of the quote currency (USD)
Mini Lot:
A mini forex lot is one-tenth of a conventional lot’s size. In forex, this signifies a mini lot is worth 10,000 currency units. Because a mini lot is smaller than a conventional lot, the profit and loss effect is smaller.
Example, One mini lot of the base currency (EUR) would be 13,000 units if the EUR/USD conversion rate was $1.3000. This means that to buy 10,000 units of EUR at the present price, you’d need 13,000 units of the quoted currency (USD).
Micro Lot:
A micro forex lot is one-tenth the size of a mini lot. It is therefore worth 1000 units of money. If you were trading EUR, a pip movement would result in a cash swing of one currency unit, or €1. Micro lots are more affordable and make a smaller impact on your bottom line.
For example, One micro lot of the base currency (EUR) would be 1300 units if the EUR/USD conversion rate was $1.3000. This means that to buy 1000 units of EUR at the present price, you’d need 1300 units of the quoted currency (USD).
Nano Lot:
A nano-sized Forex lot is one tenth the size of a micro lot. It’s equal to 100 units of the base currency, for example, €0.01 in EUR if you’re trading it. With a micro lot, a one-pip movement usually equates to 0.01 units of the base currency, with €0.01 as an example in this case.
Example: Imagine that you wanted to buy one nano-lot of the base currency (EUR) for 130 units of the quote currency (USD). This means that to buy 100 units of EUR at the present price, you’d need 130 units of the quoted currency (USD).
When trading forex, how do you calculate the lot size?
For those who are trading Forex, calculating the lot size is an important part of the trade. The lot size is the total amount of funds that are at risk in a trade and it is calculated by multiplying the shares traded by their value.
The lot size can be calculated by finding the leverage ratio, which is the number of units that you want to put up as collateral for every unit in your account. For example, if you want to trade 100 units and your account balance is $10,000, then you need to put up 10% ($1,000) as collateral for each unit in your account.
This formula can be used as:
number of lots * 100,000 = how many lots
2 lots * 100,000 = 200,000 units
5 mini lots (0.5) * 100,000 = 50,000 units
3 nano lots (0.003) * 100,000 = 300 units
You must, however, be aware of the pip’s value in relation to the lot size and formula which would be
(pip value/current rate) * lot size
With a few exceptions, the value of a pip in most currencies is 0.0001, therefore let’s look at an example of a 0.0001 value.
(value of pip = four decimal place behind/1.1660) * 1 lot (100,000 units)
(0.0001*1.1660) * 100,000 = $11.66/ pip.
If you change nano lots which has 1,000 units:
(0.0001×1.1660) * 1,000 = $0.1166/ pip.
Summing Up
Forex trading requires understanding a lot of different numbers in order to make the right trades. Take a look at what a “lot” is and why they’re important when trading forex.
- The term “forex lot” refers to a unit of measurement in the forex market. It’s typically seen by those who buy or sell currency and figure out how many units you’re buying or selling in your order.
- Forex lot is an industry term that refers to the amount of units of a currency you’re buying. It’s the amount that it takes to buy one unit from a broker when trading in foreign currencies.
- There are four types of lots available in the market: standard, mini, micro, and nano. The standard lot size is 100,000 units while the mini lot size is 10,000 units. The micro lot size can be as small as 2,500.
- The lot size and the number of lots you buy or sell define the size of your position.
It is also a way to measure how many shares/units you own in a given stock, commodity, or ETF. The number of lots set by the lot size determines how much of your position you are holding.
The main definition of a lot size is the number of items that are available on the market at one time. It is typically expressed as a quantity, which can be either in raw units or with units like ounces, pounds, and tons. Traders typically use this number to set their stop loss levels or profit targets based on how many items they would buy at different price ranges. Hopefully, by the end of this article, you’ll have a better idea of what a lot size in forex trading is.
Now that you’ve learned the fundamentals of what a lot size in forex is and how to calculate it, you can stop making the mistakes that many traders make by jumping into trades without considering the risk-reward ratio. You will be able to focus on making pips and increasing your trading profits!
The beauty of today’s trading platforms is that they remember the preferences of a trader. Optimal trading speed can be achieved by telling the system to give preference to a certain type of order. For example, if a trader wishes to trade in increments of 0.5, he or she may tell the system to automate such trading behavior and allow for quick and easy trading while reducing careless mistakes.
