Every new forex trader who enters the market must know what a forex lot is. Trading with incorrect lot sizes can drain your trading account very quickly. Therefore, it is important to understand the concept of a lot. How does it work? How can it affect a transaction? This article contains the answers to these and many other questions.
What is a Lot in Forex?
On the Forex market, you cannot buy or sell random amounts of currency. Instead, there are some specific units that you can trade. In Forex, unlike the stock market, we deal with so-called “lots.”
A lot is a unit of measure in forex trading. It is also sometimes called the lot size.
Forex Lot Types
Before, there was only one type of lot, but now there are four. These lots are categorised based on their size:
The main unit of measurement is the standard lot. For currency pairings, it is 100,000 units of the base currency. Thanks to the leverage that brokers offer, a trader does not need hundreds of thousands of dollars in their account in order to trade full lots.
A mini lot is equivalent to 0.1 of a standard lot, which is equal to 10,000 units of the base currency. This is good for traders who want to trade with less than $1,000 capital.
A micro lot is 0.1 of a standard lot, which is equal to 1,000 units of the base currency. So, a trader needs even less money than a mini lot to open a trade.
A nano lot is just 0.001 of the standard lot, which is equal to 100 units of the base currency and is almost obsolete in real trading.
Brokers instead offer cent or nano accounts. On these accounts, a trader’s capital is measured in cents. On a cent account, 10 dollars will show up as 1,000 cents.
The lot size and the number of monetary units for different types of lots are shown in the table below.
So, for example, buying one standard USDJPY lot means you are buying $100,000. Similarly, buying one GBPJPY mini lot means you are selling £10,000.
How to Calculate a Lot in Forex?
The value of a forex pip is based on the value of each pip and the lot size of the trading currency.
Example 1: EURUSD
The EURUSD exchange rate is 1.1140. Let’s calculate the pip value when 100,000 currency units are traded.
Pip value = (0.0001 / 1.1140) × 100,000 = €8.97 (8.97 × 1.1140 = $9.99).
Thus, if you buy one standard lot of EURUSD, you will receive about $10 per pip.
Example 2: USDCAD
Assuming the current exchange rate is 1.3180, let’s calculate the pip value when one USDCAD mini lot is traded.
Pip value = (0.0001 / 1.3180) × 10000 = $0.75.
Thus, for every pip that moves in your direction, you will receive $0.75.
Example 3: USDJPY
If the current USDJPY exchange rate is 108.80, then the value of a pip when 1,000 units (one micro-lot) of the currency pair is traded is:
Pip value = (0.01 / 108.80) × 1000 = $0.09.
Basically, if you trade 1000 units of USDJPY, then for each pip you will gain/loss $0.09.
Forex Lot Size Calculator
The position size calculator is a useful tool that helps traders calculate the required position size based on the currency pair, the risk level (in percentages or money), and the stop loss (in pips).
You can use a free position size calculator like the one offered by babypips.com for this purpose.
How Forex Lot and Leverage Works
Many new traders think that they need 100,000 units of currency to trade a standard Forex lot. But this isn’t true. Even a small investor or retail trader can trade a standard lot without having 100,000 units of currency.
This was made possible thanks to brokers who offer a service such as leverage. Here, the broker acts like a bank and provides the funds you need to open a position. In order to receive this money, you will need to deposit some amount into the broker’s account as collateral.
For example, if the broker’s leverage is 1:100, this means that you only need 1% of the lot size you want to trade. So, if you want to open a position worth $100,000, you only need $1,000 to open a trade. This $1,000 is held as collateral by the broker when the position is opened, and it is returned when the trade is closed.