What Is a Lot in Forex
Every novice Forex trader, at the beginning of his journey in the financial markets, faces the concept of the lot. On the majority of trading platforms, the lot size should be set independently. So, what is a lot? Does its size matter? How can it affect the transaction? You will learn the answers to these and many more questions after reading this article.
What Is a Lot Size in Forex?
A lot is a unit of measurement of a product at an auction or an exchange. A lot size means a certain volume of goods, which is convenient to operate in trading.
For example, at auctions the lot is usually one item:
- a work of art
- a piece of jewelry
- an ancient artifact, etc.
At the exchange, the lot is often formed by a certain amount of goods:
- 100 barrels of oil
- 100 ounces of gold
- 100,000 currency units, etc.
As on any exchange, Forex lot is a standard unit of measurement of goods traded. Lot size differs depending on the type of asset:
- energy resources
- cryptocurrencies, etc.
Let’s say, a lot of the EUR/USD currency pair on the Forex market is 100,000 euros, the lot of GBP/USD is 100,000 pounds, the lot of USD/JPY is 100,000 dollars, etc. In currency pairs, the lot will almost always be 100,000 units of base currency – the first one in the currency pair.
Forex lots may differ, not only by the asset but also by type and size.
There are several types of lots.
A standard lot is the main unit of measurement in Forex. For currency pairs, it is 100,000 units of the base currency. Due to the use of leverage (margin trading), a trader does not need to have hundreds of thousands of dollars in his account to trade full lots on Forex.
For example, having only 1,000 dollars on the account and using the leverage of 1:200 provided by the broker, the trader can operate with 200,000 dollars. In this case, he can buy one lot of EUR/USD, GBP/USD, or any other currency pair.
A mini lot is 0.1 of the standard lot. On Forex, a mini lot is equal to 10,000 units of the base currency. Mini lots have been introduced in order for traders to be able to make transactions even with capital less than $1,000. In addition, mini lots give room to maneuver: instead of opening a single deal with a full lot, a trader can open several deals with a smaller volume, and wait for a more favorable price.
A micro lot is 0.01 of the standard lot. On Forex, a micro lot is equal to one thousand units of the base currency. The meaning of a micro lot is the same as the meaning of a mini lot, but a trader needs even less capital for the transaction.
A nano lot is 0.001 of the standard lot. On Forex, a nano lot is equal to one hundred units of the base currency. Nano lots are practically obsolete in real trading.
Instead, brokers launch cent or nano accounts. On such accounts, the trader's capital is measured but in cents. Ten dollars on a cent account will be displayed as 1,000 cents.
A board lot is a block of shares, which differs depending on the company. For example, for one company, the round lot will be equal to 1,000 shares, and for another to 10 shares.
A round lot is often like a board lot, but it can be larger. For example, with a board lot of 100 shares, round lot shares may be equal to 300. In this situation, a round lot is equal to 3 board lot.
An odd lot is usually a part of the board lot. It can be any number of shares, 5, 15, or even 37 with a board lot of 100. This lot is a rare phenomenon on the exchange because brokers charge a higher commission for its formation.
Why Forex Lot Is Important in Trading and How to Calculate It on Forex
The trader chooses the lot for each trade independently. Potential profit and loss depend on the transaction volume.
Depending on the selected lot, one minimal change in the asset price will bring different profits or losses.
For example, if you trade one full lot of EUR/USD, the price increase by one pip (percentage in point) will either bring the trader 10 dollars (if the transaction was opened for purchase) or reduce his capital by 10 dollars. If the deal was opened for one micro lot (10,000 EUR/USD), the trader's capital would change by only one dollar.
What Are CFD Lots
CFDs are contracts for price differences that allow you to trade in Forex shares, gold, oil, and other non-currency instruments.
Lots for CFDs will correspond with the asset for which the contract was launched. For example, 1 CFD lot for oil will be equal to 100 barrels. And one lot of CFD per share of a company will be equal to its board lot.
It is a bit more difficult to calculate the CFD lot for trading, but the principle remains the same - it is recommended to open deals with a lot, which is a maximum of 10 times more than the trader's capital.
For effective trading, each trader should be able to calculate a lot correctly. One needs the practice to learn how to calculate a lot properly, and the best way to do so is to use a demo account. A demo account is available for free on the Libertex platform. In addition, the multiplier mode allows you to calculate the volume of a deal using a simplified scheme, so even beginners can handle this task.
Why to trade with Libertex?
Libertex offers all its affiliates:
- access to a demo account free of charge
- technical assistance to the operator 5 days a week, 24 hours a day
- leverage up to 1:500
- operate on a platform for any device : Libertex and Metatrader 4 and 5
- no commissions for extractions in Latin America