What is a Lot?
Currency pairs are traded in “lots”, which represents the amount of the currency pair that you are buying or selling. The three most common types of lots are the standard, the mini and the micro. One standard lot is equal to 100,000 units of the base currency, which means 1 lot of EURUSD would be equal to 100,000 euros. One mini lot is 10,000 units of the base currency, which would mean that 1 mini lot of GBPUSD would be equal 10,000 British pounds. Finally, 1 micro lot is equal to 1,000 units of the base currency in your currency pair. 1 micro lot of USDJPY is equal to 1,000 US Dollars.
Why do we trade forex in lots of this size?
The change in the value of one currency against another is measured in pips, which break down a currency’s unit value to several decimal places. To see a significant profit from tiny price changes, you need to trade large amounts of a currency.
Here’s a sample calculation:
EUR/USD has an exchange rate of 1.1930One pip is represented by 0.0001You trade with a standard lot size (100,000 units) Therefore: (.0001 x 100,00 = $10 per pip(0.0001 / 1.1930) * 100,000 = 8.38 EUR
Which type of lot should I trade?
In forex, the size of lot you trade – micro, mini or standard – will depend on what your current trading account assets are, and on the amount you’re prepared to risk.
Recommended lot sizes:
Micro Lot (or 0.01 lot size) – good for when you’re just starting out and want to minimise risk, or if you’re experienced but want to try out a new trading strategy.
Mini Lot (or 0.10 lot size) – for when you’re ready to take a little more risk and increase your potential gains.
Standard Lot (or 1.0 lot size) – for experienced traders with large accounts who can handle substantial losses.
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Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.