To trade currency pairs, you need to understand the concept of how lots are traded in forex. This guide explains what a forex lot is, why it’s important and how you can use it to calculate your position size.
What is a lot in forex trading?
A lot in forex trading is a unit of measurement that standardizes trade size. The change in the value of one currency compared to another is measured in pips, which are the fourth decimal place and therefore very tiny measures. This means trading a single unit isn’t viable, so lots exist to enable people to trade these small movements in large batches.
The value of a lot is set by an exchange or a similar market regulator, which ensures everyone trades a set amount and knows how much of an asset they are trading when they open a position.
Understanding lots in forex with boxes of chocolates
Let’s say that a company sold boxes of chocolates in two sizes: 12 and 24 chocolates. These are standard sizes and ones consumers have come to expect. They don’t often expect to buy just one chocolate out of the box.
It’s the same with forex currency pairs. You can’t just buy one unit of currency; instead, you buy a lot. Lots come in standard sizes that are universally recognized. For example, you could buy 10,000 lots of base currency GBP for the currency pair GBP/USD. That’s a standard lot. Alternatively, you could buy a mini lot of 1000 GBP.
Forex lot sizes explained
So, how much is one lot in forex? It depends on whether you’re trading a standard, mini or micro lot. Forex trades are divided into these four standardized units of measurement to help account for small changes in the value of a currency.
The following examples all relate to the currency pair EURUSD, which compares the euro (the base currency) against the dollar (the quote currency). For context, if you buy EUR/USD, you’re speculating that the euro is going to strengthen against the dollar. If the quote price is currently $1.3000, that means you can exchange €1 for $1.3000. To put it the other way around, you need $1.3000 to buy €1.
What is a standard lot in forex?
A standard lot in forex is equal to 10,000 currency units. It’s the standard unit size for traders, whether they’re independent or institutional.
If the EURUSD exchange rate was $1.3000, one standard lot of the base currency (EUR) would be 13,000 units. This means, at the current price, you’d need 13,000 units of the quote currency (USD) to buy 10,000 units of EUR.
What is a mini lot in forex?
A mini forex lot is one-tenth the size of a standard lot. That means a mini lot in forex is worth 1,000 currency units. The size of a mini lot means the profit and loss effect is lower than a standard lot.
If the EURUSD exchange rate was $1.300, one mini lot of the base currency (EUR) would be 1,300 units. This means, at the current price, you’d need 1,300 units of the quote currency (USD) to buy 1,000 units of EUR.
What is a micro lot in forex?
A micro forex lot is one-tenth the size of a mini lot. That means it’s worth 100 units of currency. Micro lots require less leverage, so a swing won’t have as much of a financial impact as with larger lot sizes.
If the EURUSD exchange rate was $1.3000, one micro lot of the base currency (EUR) would be 130 units. This means, at the current price, you’d need 130 units of the quote currency (USD) to buy 100 units of EUR.
How do you calculate the lot size when trading forex?
You won’t normally need to calculate the lot size yourself, as your trading platform should tell you what you need to know. It should be clear when you’re placing a trade what options are available – standard, mini and micro – and which lot size you’re using. You can calculate the overall size of your position by the size of a lot and the number of lots you’ve bought.
With IG, you can trade standard or micro lots using CFDs. Our platform allows you to toggle between the two before you execute the order.
How to choose lot size in forex
To choose your lot size, think about the risk you want to take. The greater the lot size, the more money you’ll need to put down or leverage you’ll need to use – and the greater each pip movement will be magnified.
A one-pip movement is worth the following monetary amounts for each lot sizes, assuming you’re trading EURUSD:
- A standard lot = $1
- A mini lot = $0.10
- A micro lot = $0.01
Remember the currency value will depend on the base currency within the currency pair you’re trading. As you can see, the smaller the lot, the less a one-pip movement costs. In turn, that means you can have a smaller outlay by trading smaller lots.
How can I start trading forex?
You can trade forex online with us. Before you start, you might want to register for our Forex Training. Once you’re comfortable with the basics and how lots in forex work, you can either open a live account and start trading live straight away or create a free demo account to hone your skills.
How to trade forex
- Open a live account or log in to your existing trading account.
- Download our trading terminal and find the pair you want to take a position on.
- Decide whether to go long to buy or short to sell.
- Confirm your deal size.
- Open and monitor your position.
When you trade with us, you’ll use CFDs to go long or short on a currency pair’s price. Going long means that you’re speculating that the pair will increase in value, meaning that the quote is weakening against the base. Going short means that you’re speculating that the pair will decrease in value, meaning that the quote is strengthening against the base.
One main advantage of using CFDs to trade forex is leverage. This enables you to open a position by paying a small percentage of the full value upfront – but bear in mind your exposure will be based on the full value of the trade.
Forex lots summed up
To trade forex effectively, you need to understand lots. Here’s a reminder of what lots in forex are and why they are important:
- Forex lots are units of measurement. They determine how many units of a currency you’re buying
- You can buy four types of lots in forex: standard, mini and micro
- Your position size is determined by the lot size, and the number or lots you buy or sell
Disclaimer: All investments and trading in the stock market involve risk and is a personal decision. This article “How Are Lots Traded in Forex?” is not a trading advice or instruction from Instaforex Nigeria but meant to create awareness about Forex trading.