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To trade currency pairs, you need to understand the concept of lot in Forex. This article from Brokerland explains what Forex lots are, why they are important, and how you can use them to calculate the size of your trades or position.
What Is Lot in Forex?
A Forex lot is essentially a unit of measurement that standardizes the volume of a trade. Changes in the value of one currency in comparison to another are measured in pips, which are the fourth decimal point and thus a very small measure. This means that trading a single unit is not practical. Lots in forex were introduced to enable individuals to trade these small movements in larger categories.
The value of a lot is determined by a broker or a similar market regulator, ensuring that each individual knows how much of an asset they are trading when they open a position.
Lots come in four standard sizes: standard, mini, micro, and nano, providing traders with more control.
Understanding Forex Lots with Chocolate Boxes
Imagine a company selling chocolate boxes in two sizes: 12 and 24. These are standard sizes that consumers and buyers expect. They don’t typically expect to buy just one chocolate from the box.
In the case of Forex currency pairs, it’s the same. You can’t just buy a single unit of currency; instead, you buy a certain amount in a lot in forex. Lots are standard sizes recognized globally. For example, you can purchase 100,000 units of the GBP base currency for the GBP/USD currency pair. This is a standard amount. On the other hand, you can buy a micro lot of 1,000 pounds.
Forex Lot Sizes
So, how much is a Forex lot? It depends on whether you are trading a standard, mini, micro, or nano lot in forex. Forex trades are divided into these four standard measurement units to calculate minor changes in the value of a currency.
The following examples all relate to the EUR/USD currency pair, which compares the Euro (base currency) to the US Dollar (counter currency). For context, if you buy EUR/USD, you are speculating that the Euro is strengthening against the Dollar. If the current exchange rate for the counter currency is 1.3000 dollars, it means you can exchange 1 Euro for 1.3000 dollars. In other words, you need 1.3000 dollars to buy 1 Euro.
A standard lot in Forex is equal to 100,000 currency units. This standard unit size is used by both independent and institutional traders.
If the EUR/USD exchange rate is 1.3000 dollars, one standard lot of the base currency (EUR) will be 100,000 units. This means that at the current price, you would need 130,000 counter currency units (USD) to buy 100,000 units of Euro.
Mini Lot in Forex
A mini lot in Forex is one-tenth of a standard lot. This means that a mini lot is worth 10,000 currency units. The size of a mini lot implies that the profit and loss effects are less compared to a standard lot.
If the EUR/USD exchange rate is 1.3000 dollars, one mini lot of the base currency (EUR) will be 10,000 units. This means that at the current price, you would need 13,000 counter currency units (USD) to buy 10,000 units of Euro.
Micro Forex Lots
A micro lot in Forex is one-tenth of the size of a mini lot, which means it’s worth 1,000 currency units. Movements of one pip result in a cash fluctuation of 0.01 currency units, for example, 0.01 Euro if you are trading with the Euro. Micro lots also require less leverage or margin, so a small pip movement has a smaller financial impact compared to larger lot sizes.
If the EUR/USD exchange rate is 1.3000 dollars, one micro lot of the base currency (EUR) will be 1,000 units. This means that at the current price, you would need 1,300 counter currency units (USD) to buy 1,000 units of Euro.
Nano Lot in Forex
A nano lot in Forex is one-tenth of the size of a micro lot, or 100 currency units. A one-pip movement with a micro lot results in a price change of 0.01 units of the base currency you are trading, for example, 0.01 Euro if you are trading with the Euro.
If the EUR/USD exchange rate is 1.3000 dollars, one nano lot of the base currency (EUR) will be 100 units. This means that at the current price, you would need 130 counter currency units (USD) to buy 100 units of Euro.
How to Calculate Lot Size in Forex
You typically don’t need to manually calculate lot sizes in Forex because your trading platform should provide you with the necessary information. When you trade, it should be clear which options are available – standard, mini, micro, and nano lots – and which lot size you are using. You can calculate the overall position size by multiplying the lot size and the number of lots you’ve purchased.
Selecting the Forex Lot Size
To choose your lot size, consider the level of risk you’re willing to take. The larger the Forex lot size, the more money you need to invest, and it requires higher leverage. Additionally, each pip movement becomes more significant.
The monetary value of a single pip movement for each lot size, assuming you are trading EUR/USD, is as follows:
- Standard Lot = $10
- Mini Lot = $1
- Micro Lot = $0.10
- Nano Lot = $0.01
Keep in mind that the value of the currency pair in relation to the base currency in the currency pair you’re trading will affect the calculation. As you can see, smaller Forex lot sizes have a lower cost for each pip movement. This means that you can incur lower expenses by trading smaller lots.