A lot is a unit of measurement used in forex trading to standardize trade size. Pips, which are very small measurements representing the fourth decimal place, are used to compare the value of one currency to another.
Due to the impracticality of trading a single unit, lots were developed to allow traders to exchange these minor fluctuations in bulk.
An exchange or other comparable market regulator establishes the value of a lot, ensuring that everyone trades a predetermined amount and is aware of how much of an asset they are trading when they initiate a position.
The four sizes of lots—standard, mini, micro, and nano—are used to further separate them and allow traders more control over their exposure.
Sizes Of Forex Lots Explained
So, how much does a currency lot cost? Whether you're trading a regular, mini, micro, or nano lot will determine this. These four standardized units of measurement are used to split up forex trades in order to account for minute variations in a currency's value.
The examples that follow are all connected to the currency pair EURUSD, which contrasts the euro (the base currency) with the dollar (the quote currency).
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To put things in perspective, if you buy EUR/USD, you're making a bet that the euro will gain strength against the dollar. You can trade €1 for $1.3000 if the quote price is now $1.3000. To put it another way, $1 equals 1.3000 dollars.
What Does A Typical Forex Lot Mean?
In the world of forex, 100,000 currency units make up a normal lot. Regardless of whether a trader is institutional or independent, this is the accepted unit size.
Example:
One standard lot of the base currency (EUR) would be 130,000 units at the EURUSD conversion rate of $1.3000. Accordingly, 100,000 units of EUR would cost 130,000 units of the quoted currency (USD) at the current exchange rate.
In Forex, What Is A Tiny Lot?
A normal forex lot is ten times smaller than a tiny lot. In other words, a small lot of FX is worth 10,000 units of money. A micro lot's size translates to a less profit and loss impact than a conventional lot.
Example:
13,000 units would make up one mini lot of the base currency (EUR) if the EURUSD conversion rate was $1.3000. This means that in order to purchase 10,000 units of EUR at the current price, 13,000 units of the quoted currency (USD) are required.
What Does A Forex Micro Lot Mean?
The size of a micro lot in forex is one-tenth that of a mini lot. This indicates that it is worth 1000 units of money. The monetary swing caused by a pip movement is 1 unit of currency, or €1 if you were trading EUR.
Additionally, because micro lots don't require as much leverage as larger lots, a swing won't have the same financial impact.
Example:
1300 units would make up one micro lot of the base currency (EUR) if the EURUSD conversion rate was $1.3000. Accordingly, 1000 units of EUR would cost 1300 units of the quoted currency (USD) at the current exchange rate.
What Does A Forex Nano Lot Mean?
One-tenth of a micro lot is a nano lot in the FX market. It equates to 100 pieces of money. A micro lot's one pip movement corresponds to a price change of 0.01 units of the base currency you are trading, such as €0.01 for EUR.
Example:
130 units would make up one nano lot of the base currency (EUR) if the EURUSD conversion rate were $1.3000. Accordingly, 100 units of EUR would cost 130 units of the quote currency (USD) at the current exchange rate.
In our guide to forex trading, you can read more about buying currency pairs.
Using Chocolate Boxes To Explain Currency Lots
Consider a business that offered chocolate boxes in two different sizes: 12 and 24 pieces. These are typical sizes that customers have grown accustomed to. They don't frequently plan to purchase just one chocolate from the box.
With forex currency pairs, it is the same. You must purchase many units of currency; you cannot purchase just one. Lots are available in generally recognizable standard sizes.
For the currency pair GBP/USD, for instance, you may purchase 100,000 lots of GBP as the base currency. That is a common lot. Instead, you might purchase a tiny lot for 1000 GBP.
When Trading Forex, How Do You Determine The Lot Size?
As your trading platform should inform you with the necessary information, you typically won't need to determine the lot size yourself.
The available options—standard, mini, micro, and nano—as well as the lot size you're using—should be obvious while you're placing a trade.
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By taking into account the size of a lot and the quantity of lots you've purchased, you can determine the overall size of your location.
With IG, you may use CFDs to trade normal or micro lots. Before you place the order, you can switch back and forth between the two using our platform.
How To Pick The Right Forex Lot Size
Think about the risk you wish to take before selecting your lot size. The bigger the lot size, the more leverage you'll need to utilize or money you'll need to put down. Additionally, the more each pip movement will be amplified.
If you're trading EURUSD, a change of one pip is equivalent to the following sums in money for each lot size:
A standard lot = $10
A mini lot = $1
A micro lot = $0.10
A nano lot = $0.01
In the currency pair you are trading, keep in mind that the value of the currency will depend on the base currency. As you can see, the price of a one-pip movement decreases with the size of the lot.
This implies that by trading smaller amounts, you can have a lower investment.
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