What is a Lot in Forex?

Foreign exchange or Forex involves the exchange of currencies. That is, trading one currency for another. For example, a trader can exchange US Dollars for the Japanese Yen. This trade can only take place on the foreign exchange market. It can also get called the forex market. This is the biggest exchange market globally. It has the highest level of liquidity.

The forex market makes use of lots in its execution of trades. There are either nano, mini, micro, or standard lots. A mini lot signifies 10,000 worth of the desired currency. A micro lot signifies 1,000 worth of the desired currency. Standard lot signifies 100,000 worth of the desired currency.

Lots in Forex

The unit of measurement in the forex market gets called a lot. It standardizes the trade’s size. The value of a currency, when compared to another, can get measured. This change in a currency’s value can get measured in pips.

They are very tiny measures, usually in four decimal places. This means that it is not likely to trade a single unit. Lots get used for trading small movements but in large numbers.

The value of a lot gets based on the size of the exchange. The value can also get determined by a similar market regulator. This guarantees traders can trade a certain amount. This also makes certain traders know the amount to get traded in an open position. A trader cannot buy only one unit of currency. He buys a lot instead.

There are four sizes of lots, nano, micro, mini and standard lots. These lots give traders a certain level of control over the exposure they have. Lots have standard sizes that get known globally.

A trader can buy a lot size of 100,000 for JPY base currency. Let’s assume this lot size got bought for the currency pair JPY/USD. This is an example of the standard lot size.

A trader can buy a lot size of 10,000 for JPY base currency. This lot size got bought for JPY/USD. This is an example of the mini lot size.

A trader can buy a lot size of 1000 for JPY base currency. This lot size got bought for JPY/USD. This is an example of the micro-lot size.

A trader can buy a lot size of 100 for JPY base currency. This lot size got bought for JPY/USD. This is an example of the nano lot size.

Traders buy and sell financial instruments on the foreign exchange market. This gets done with the use of lots. A lot has a fixed unit quantity. The quantity depends on the financial instrument that is being traded.

The fixed lot sizes for stocks have been 100 shares. That is, before the introduction of online trading. A round lot unit is number of shares that can get divided by 100, such as 400, 1500, or 500 shares.

There are also odd lots. These are lots that are below 100 shares. There are also mixed lots. These are lots that are above 100 shares but cannot get divided by 100. However, the mixed lots are more common.

The standard lot size for exchange-traded securities is also 100 shares.

Lot Sizes in Forex

In the financial market, the lot size is number of units a base currency can get exchanged for. You can tell the unit number by the type of lot size selected. A round lot in the foreign exchange market represents 100 shares.

Knowing the value of a lot in the forex market is dependent on the lot size used by a trader. There are four sizes of lots known in the world. These lot sizes help a trader detect a change in a currency’s value.

Let’s look at an example of lot sizes relating to the JPY/USD. This compares the JPY against the USD. The JPY is the base currency, while the USD is the quoted currency. This means that a trader buying the JPY/USD predicts the JPY’s rise against the USD. This means that if the USD is 0.0079, then 1¥ is equal to 0.0079$. In other words, it would take 0.0079$ to buy 1¥.

The Standard Lot Size

This represents 100,000 base units of a currency pair. It is the unit of base currency size in the forex market. This lot size refers to the quantity or number of an asset that is to get traded.

One pip movement of the standard lot size represents  $10 shift in price value. For example, a trader buys USD at $200,000 standard lot size. And he buys the USD against the JPY at ¥210.0. If the rate of exchange rises to ¥210.50, then this is about 50 pip price movement. The trader will make a profit of $500.

Suppose the exchange rate falls to ¥2019.50. The trader will suffer $500 in net losses.

The Mini Lot Size

The mini lot size represents one-tenth the size of any standard lot size. One pip of a USD currency pair represents a $1.00 change in price value. That is, using a mini lot size. This lot size gets used more for mini forex accounts. These accounts can get opened with some forex brokerage dealers.

They get used more by inexperienced traders. That is, traders that are new and are learning how to trade. The price movements of mini lots have a smaller impact. There is less price volatility on open positions.

Traders do not need a lot of capital to open an account that uses the mini lot size. Inexperienced traders can open this account type with a small of $100.

Experienced traders can also use this account type. They use it to have more control over their positions. For instance, an experienced trader may want to try a new trend. This new trend involves smaller increments that are less than 10,000 units. This can get done using a small-sized account that uses a mini lot size.

Traders also use this type of account size and lot size to test new strategies. This helps to achieve greater profits at low-risk levels.

The Micro Lot Size

This lot size represents one-tenth the size of mini lot size. It also represents 1,000 units of this base currency involved. One pip of a USD currency pair represents a $0.01 change in price value. That is, using a micro lot size.

The micro lot helps small-scale traders to trade using small increments. It also ensures low-risk trades.

For example, a trader places a trade using the micro lot. This means he placed a trade for 1000 units of the currency to the bought or sold. Using the JPY/USD, the JPY is the base currency. The JPY will get bought with 1000 units when using the micro lot size.

A micro lot is one of the smallest lot sizes used by traders in the forex market. It gets used more by novice or inexperienced traders. It gets used to avoiding potential risks and losses of capital.

Traders use the micro lot when they choose not to trade with the standard or mini lot sizes. 10 micro lots represent 1 mini lot. That is 10,000 units of a base currency.

10 mini lots represent 1 standard lot. That is 100,000 unit size of a base currency. Trading using the micro lot does not restrict a trader as got believed. A trader can trade using any lot size of his choice. That is, a trader can use a small or large lot size.

A trader can use one micro lot in trading or 1,000 micro-lots. 1,000 micro lots represent 1,000,000 units of a base currency. It also represents 10 standard lots.

Micro lots also offer fine-tuned position sizes like the 125 micro-lots. The 125 micro lots represent 12.5 mini lots.

The Nano Lot Size

This lot size represents one-tenth the size of a micro lot size. It also represents 100 units of the base currency involved. One pip of a USD currency pair represents a $0.001 change in price value. That is, using nano lot size.

A trader who places an order using the nao lot would sell or buy 100 units of a base currency. It is very beneficial to beginners. It reduces the risk of loss of capital. Beginners can also trade using nano lots to increase their portfolio size. It also helps to improve their trading strategies.

It may be tempting to use the smallest lot size when starting trading on the foreign exchange market. This is because it minimizes the risk of a trader’s capital. Traders may act out if a large sum of capital is at risk.

It is vital for traders to increase the capital at risk. This should be when trading gets started on the exchange market. It is better than jumping from the nano lot size to the standard lot size, especially when a strategy appears to be effective.

Algorithmic traders should also make sure that there are no changes in slippage. And there are no changes in other costs when they want to increase their lot sizes, especially after having a successful and working strategy.

To choose a suitable lot size, a trader should first consider the level of risk he is willing to take. The greater the number, the greater the risk, and also, the greater the amount he will invest and the level he will use. This also means the pip movement will get increased.

Assuming a trader is trading JPY/USD, the lot size for each pip movement will be as follows:

• A nano lot size will have $0.01
• A micro lot size will have $0.10
• A mini lot size will have $1
• Standard lot will have $10

The price value of the currency will depend on the base currency that is being traded. When the lot is smaller in size, the lower the cost of a one pip movement. This also means that trading smaller lot sizes assures lower risks.

0.01 Lot Size

The key to efficient trading is to understand the different lot sizes. This will enable a trader to determine the cost and the risk-reward ratio as well.

The 0.01 lot size in forex trading represents 1000 units of a base currency. It can also get called the micro lot size. Every forex pair that has USD as quote currency has a $0.10 micro lot.

When a trader places a trade of JPY/USD using a micro lot, if the price moves up to 50 pips in his favor, he makes a profit. His profit will get calculated by multiplying 50 pips by $0.1. That is, he made a profit of $5.

Assuming the currency pair JPY/USD moves only one pip in a week. Pip value per lot size will be $5 in this trade. If a broker charges five pips as a spread, there will be no profit for the trader.

This implies that each time a trader opens a one lot trade, he will pay a $50 commission. And the profit he will make weekly will be $5. This is due to the micro lot size that is low. This is also due to the slow currency pair price variation.

A mini lot is a unit of the base currency. This gets referred to as 0.01 lots in the forex market. If a trader purchases 0.01 lots of JPY/USD, he purchases ¥1,000 worth of USD.

Determining the Lot Size For Different Account Types

Think about the amount of risk you are willing to take before choosing a lot size. A bigger lot size will need a higher deposit.

It will also need a higher ratio of leverage. This would also mean that the pip movement will get heightened.

A trader that has up to $500 in his account should use the nano lot size. A trader that has up to $1000 or $1500 in his account should use the micro lot size.

A trader that has up to $5,000 or $10,000 in his account should use the mini lot size. A trader that has up to $15,000 and above in his account should use the standard lot size.

The lot size to get used can vary and get determined by the region or country of a trader. It can also get determined by a broker and the leverage offered.

How Forex Lots Impact Trading

A trader’s lot size determines his profit potential. The value per pip is the main factor that determines the lot size to get used. A good forex strategy needs good risk management. Trading without using the stop loss option can be very detrimental.

It is essential to set a stop loss margin on every trade. This helps cut losses by ending trade at once. That is when it gets to the set margin. The stop loss gets measured in pips.

The major advantage of the forex market is that it can get traded with low capital. Live markets can get traded using a very low capital and lot size. The least deposit amount depends on the broker used. Most brokers offer the use of the nano lot size for small-sized accounts. This lot size offers a very low-risk trade with little or no losses.

A larger lot size would bring a larger profit but has a high risk. The standard lot size is the largest lot size on the forex market. It gets used more for accounts with large capital. It offers a high-profit percentage as well as a high level of risk. The standard lot size gets used more for $15,000 or more accounts.

The mini lot size is the second-highest lot size on the forex market. It can get used for medium-sized accounts. It offers medium-sized risk and profits. It can get used for accounts with $5,000 to $10,000.

The micro lot size is one of the lot sizes on the forex market. It can get used for small-sized accounts. It offers low-level risks and profits. It can get used for accounts with $1000 to $3000. It is the lowest lot size offered by some brokerage platforms.

The nano lot size is the smallest lot size available in the forex market. It is not available on every brokerage platform. It gets used more for very small-sized accounts. It is ideal for accounts with $500 below. It offers low-level risks and profits. Profits made using this lot size will be very small.

It is the lowest lot size offered by a few broker’s platforms.

Pip Values Per Lot Size

Pip’s value for the micro-lot explained using the JPY/USD currency pair. That is, USD is the quoted currency.

The formula for calculating pip value per lot size in the case where you are using USD or any other quote currency is:

Pip value = (1 pip / Exchange Rate) x Lot Size

To understand this better,

One pip – This is where the trader inserts the value of the pip he wants to trade. It is 0.01 for JPY/USD.

Exchange Rate – This is the current price of the currency pair the trader wishes to trade on.

Lot size – This is the number units of a currency. This depends on the lot size chosen. It may be 100,000, 10,000, 1,000 or even 100.

The result obtained after calculating pip value gets expressed. It can get expressed by using the base currency. This can get converted into any currency of a trader’s choice.

The only situation where a trader does not need to convert this calculation is if his base currency is USD. This is because the answer got from this calculation gets expressed in USD.

If USD is said to be the quote currency, then the calculation is not needed. Pip value for the standard lot size with the USD being the quote currency is $10. Pip value for the mini lot size with the USD being the quote currency is $1. Pip value for the micro lot size with the USD being the quote currency is $0.1. Pip value for the nano lot size with the USD being the quote currency is hen $0.01.

There is an aim for calculating Pip value per lot size. Its target is to calculate pip value per lot size. This will help to determine the amount losses or profits made in each trade. This depends on the pip movement of the trade. It also depends on the quantity of the currency used for trading.

The amount charged as spread by brokers can help understand the capital to get spent on trades. For example, a broker charges a spread of 5 pips on JPY/USD. This means a trader will spend $50 for every one lot trade made.

Knowing the amount of spread charged by a broker is very necessary. It ensures a trader’s trading plan gets met. And it also ensures a trader will not spend all his capital on commissions.

Conclusion

Trading in the foreign exchange market requires a broad understanding of lots. Lots get called units of measurement. These lots represent the amount of units of the currency a trader is buying or selling.

There are four different types of lots in the foreign exchange market, the standard, mini, micro, and nano lots. A trader’s position size gets known by the size of his lots. It is also known by the amount of lots he sells or buys.

Knowing the different lot sizes and how to calculate the pip per lot size value is very vital. This would enable a trader to develop an efficient risk management plan. That is, before placing a trade.

Frequently Asked Questions