What is forex lot size? How to calculate lots in forex?
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What is the forex lot size? How to calculate lots in forex? Lot is one of the essential concepts that every trader must know. This article will learn together what a lot is, how to calculate lots in forex. “Lots” or “Lot” is an essential concept representing the trading volume and the number of money traders invests in the market. Understanding lot size in forex will help traders to build an effective trading strategy.
What is a lot in forex?
People always have units to convert the number of goods to make calculations more accessible in daily life. For example, buying food by kilogram, water by the liter, and lot in forex is the same. In the forex market, currency pairs are considered a commodity to be bought and sold, and they are traded with a specific volume of lots.
A lot or lot in forex is a unit of measurement for a specific amount of currency in a transaction. Lot is the size of a financial contract. In other words, the amount the trader invests will be lower or higher depending on the number of lots traded.
The lot size represents the lot size. Currently, the forex market has three different lot sizes, which are:
- Standard lot
- Mini lots
- Micro lot
How to calculate Lot in Forex?
1 lot in Forex is equivalent to 100,000 units of the base currency.
Forex lot value = Lot number * Contract value
- 2 lots EUR/USD = 2 * 100,000 euros = 200,000 euros
- 20 lots EUR/USD = 20 * 100,000 euros = 2,000,000 euros
Lots and forex rates do not have any connection. They operate independently of each other, and the same goes for other financial assets.
* See more: The complete guide XM from a to z
What is the relationship between Forex lots and other terms?
What is the relationship between lots and pips in forex?
In forex trading, a lot is a unit of measurement for the volume trading of a currency pair (commodity), and a pip is a unit of measure for the change in the value of that currency pair.
For example, you buy 1 lot of EUR/USD at 1.2536 (ie 1EUR = 1.2536USD). A few minutes later, the rate rose to 1.2546. That means the price has increased by ten pips. With a trading volume of 1 lot, i.e., 100,000 EUR, you will profit $ 10/pip. If the price increases by ten pips, you will make a profit of $ 100.
What is the relationship between lots and leverage in forex?
If you only use your capital to invest in forex, the profit and loss will be very small.
For example, you use 1,226 USD to buy 1,000 EUR (i.e., buy 0.01 lot). When the EUR/USD rate increases to 1.2360, you only gain $10. The profit is too small compared to the invested capital. That’s why forex brokers allow you to use leverage up to hundreds of times. If you use leverage 1:100, with a margin of $1,226, you are allowed to use an amount of up to 122,600 USD to buy 100,000 EUR. This means you bought one lot of EUR/USD at 1.2260. Going back to the example above, when the price increases to 1.2360, with a trading volume of 1 lot of EUR/USD, you will profit $1,000.
So with leverage, you will be buying more than you have. In fact, in forex trading, no one is without leverage to increase profits. However, remember, high returns always come with significant risks. Leverage is a double-edged sword, so you should not abuse it.
What is lot size in forex? Three basic lot sizes
The forex lot size is the term used in the financial markets to calculate contract size.
There are three different lot sizes, including:
- 1.00 is referred to as one standard lot, equal to 100,000 units of the base currency.
- 0.10 is referred to as one mini-lot, which is equivalent to 10,000 units of the base currency.
- 0.01 is referred to as one micro-lot, which is equivalent to 1,000 units of the base currency.
What is the standard lot in forex?
A standard lot is the standard unit of measurement in the foreign exchange market, corresponding to 100,000 units of the base currency for each currency pair.
Very few traders can trade with one lot of forex because the investment amount is enormous. If you want to trade with one lot of forex, you need to use significant leverage.
Example of Standard lot in forex:
- 1 lot EURUSD = 100 000 EUR
- 2 lots GBPUSD = 200,000 GBP
- 1 lot USDJPY = 100,000 USD
- 3 lots AUDCAD = 300,000 AUD
What is mini lot forex?
Traders often use mini lots because they can bring attractive profits without too high an initial investment.
Mini lot in forex is equivalent to 10,000 units of base currency (equivalent to 0.1 lots).
Example of Mini lot in forex:
- 0.1 lots EURUSD = 10,000 euros
- 0.3 lots GBPUSD = 30,000 GBP
- 0.8 lots USDJPY = 80,000 USD
- 0.5 lots AUDCAD = 50,000 AUD
What is Micro Lot in Forex?
Micro lots are the lot sizes that forex traders use the most. This helps it limit trading risks as much as possible, as well as limit losses and leverage.
Therefore, micro lots are especially suitable for new traders.
Micro lot in forex is equivalent to 1,000 units of the base currency or (0.01 lots)
Example of Micro lot in forex:
- 0.07 lots EURUSD = 7,000 euros
- 0.01 lots GBPUSD = 1,000 GBP
- 0.02 lots USD JPY = 2,000 USD
- 0.04 lots AUDCAD = 4,000 AUD
The above article introduced what lots are, the value of 1 lot in forex trading. The more lots, the higher the trading risk. The larger the trading volume, the larger the profit or loss. For safe trading, traders should use mini lots or micro-lots. Success in trading mainly lies in money management and proper use of leverage.