Home Courses Course-01 9 – The Concept of Lot in Forex

9 – The Concept of Lot in Forex

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In the Forex market, you cannot buy or sell random quantities of currency. Instead, there are specific units with which you can trade. Unlike the stock market, in Forex, we deal with something called “Lots”. A lot is basically the amount of quantity you can trade in the market. A lot can also be defined as the number of units of a currency.

Types of Lots

Before, there was only one type of lot, and now, there are four. These lots are categorized based on the size of the lot.

The four types of lots are:

  • Standard Lot
  • Mini Lot
  • Micro Lot
  • Nano Lot

The lot size and the number of currency units for different types of lots are given in the table below.

Type Quantity of “Lots” Number of Units
Standard 1 100,000
Mini 0.1 10,000
Micro 0.01 1,000
Nano 0.001 100

 

Example: Buying one standard lot of USD/CAD means that you are purchasing 100,000 US dollars. Similarly, shorting one mini lot of GBP/CHF means that you’re selling 10,000 pounds.

How to calculate pip value(add “what is a pip?” link) for different lot sizes?

Pip value determines the value of each pip by considering the lot size of the trading currency.

Example 1: EUR/USD

The exchange rate of EUR/USD is 1.1140.  Let’s calculate the pip value when 100,000 units of the currency are traded.

Pip value = (0.0001 / 1.1140) x 100,000 = 8.97 euros (8.97 x 1.1140 = 9.99 US dollars)

So, if you buy one standard lot of EUR/USD, you will make around $10for every pip that goes higher.

Example 2: USD/CAD

Assuming the current exchange rate is 1.3180, let us calculate the pip value when the one mini lot of USD/CAD is traded.

Pip value = (0.0001 / 1.3180) x 10,000 = 0.75 US dollar

Therefore, for every pip that moves in your direction, you will receive $0.75.

Example 3: USD/JPY

If the current exchange rate of USD/JPY is 108.80, then the pip value when 1,000 units (one micro lot) of the currency pair is traded is,

Pip value = (0.01 / 108.80) x 1,000 = 0.09 US dollar

Basically, if you trade 1,000 units of USD/JPY, then for every pip you will be gaining/losing $0.09.

The concept of leverage

Many novice traders have a conception that, to trade a standard lot in Forex, they must possess 100,000 units of the currency. However, this is a misconception. Even a small investor or a retail trader can trade a standard lot without owning 100,000 units of the currency.

This is made possible by the brokers. Brokers offer something called as “leverage trading”. In this type of trading, the broker acts like a bank where they provide you with the required money to take a position. However, to obtain that money, you will have to deposit some amount to the broker.

For example, if the leverage provided by the broker is 100:1, then it means that you need only 1% (0.01times) of the lot size you want to trade. So, if you willing to trade a position worth 100,000 US dollars, then you will require only 1,000 US dollars to take that trade. This $1,000 is held up by the broker as a deposit until the position is open, and is given back once the trade is closed.

Hence, this completes the lesson on “Lots” in the Forex market.

Below is a quiz for you to know how well you’ve understood the concept.

1. Which type of spot market deals with “Lots”?

Correct! Wrong!

2. How many types of lots exist in the Forex market?

Correct! Wrong!

A Standard lot size consists of _____ units of currency.

Correct! Wrong!

You have bought 0.05 lots of USD/CAD. In terms of units, how many units of the currency have you purchased?

Correct! Wrong!

If the pip value for a currency is $10 when you trade with a standard lot. What will be the pip value when you trade with a micro-lot?

Correct! Wrong!

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