The term “LOT” is common parlance in the foreign exchange market. The lot is the Forex market’s unit of measure for the size of a trade.
You may have noticed that there is a wide range of lot sizes available in the foreign exchange market.
As a forex trader, this does give you some leeway in terms of how much money to invest, allowing you to strike a good balance between risk and reward. We will define a lot size and describe the various lot sizes in this article.
We humans have always used standardized measurement systems for all of our monetary transactions. You buy and sell everything from fuel oil to gold in predetermined quantities.
Let’s say you decide to go out and purchase some beer. How would you determine how many cans or bottles you would need?
It stands to reason that you’d have to make your purchase in gallons or liters. When transacting in the foreign exchange market, a lot is the standard unit of measurement for buying and selling.
You must have come across the word lot and kept wondering what it actually means when you first start out in forex without any prior knowledge of forex trading.
A lot (LOT) is the basic trading unit in the foreign exchange market. There are a variety of lot sizes, and each of those sizes has a corresponding price.
Mini lots are used for transactions involving 10,000 units of any currency and are the basis for calculating profits and losses.
Hoping to answer any questions you may have about lot size after reading this article.
But before diving into LOT, it’s important to review the pip problem. When did the pip occur?
When discussing changes in the value of a currency pair, “pip” is the most fundamental unit of analysis. The pip is defined as the fourth digit after the decimal point.
will be easier to grasp with some illustrations:
What is the pip if the exchange rate displays 1.2127 for EUR/USD?
In this case, the 7. Also, a change from 1.2127 to 1.2126 would indicate a decline of one pip.
Another Illustration;
Right now, the USD/JPY exchange rate appears to be 108.64 on my market screen.
The digits immediately following the decimal point. The 4 is the pip.
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Type of Lot Sizes
Lots can be one of four different sizes:
1. Standard lot
2. Mini lot
3. Micro lot
4. Nano lot
1. Standard Lot Size (1.0) [1 pip= $10]
If you want to buy or sell a certain currency, one standard lot is equal to 100,000 units. In the foreign exchange market, one standard lot is equal to one hundred thousand of the corresponding currency.
Using the USD/JPY currency pair as an example, a long position of one standard lot size would entail the purchase of 100,000 USD.
A second illustration would be the purchase of 100,000 Euros if a 1 lot buy position was opened at the Euro Turkish Lira exchange rate.
Therefore, when one lot represents ten dollars, the standard lot size is utilized. With a standard lot, a gain of 10 pips is equal to $100. You’ve made $200 if you traded 20 standard lots and made 10 pips.
The size difference between a standard lot and a mini lot is ten times.
2. Mini Lot Size (0.1) [1 pip = $1]
Mini lots are equal to one tenth of a regular lot. That’s why you see a value of 0.1 there. The mini lot is a favorite among brokers and among the most frequently traded units.
Mini lots are traded in multiples of 10,000 units of the currency being purchased or sold. Mini lots are fractional lots, and one mini lot equals ten thousand of a given currency when opening a trade position.
If you want to buy $10,000 in Australian dollars, for instance, and you open a mini lot buy position in the AUD/TRY exchange rate.
When you buy a “standard lot,” or “0.10,” of a currency, you are committing to acquire 10,000 of that currency.
In addition, a mini lot is ten times as big as a micro lot. Plus, with a mini lot, each pip is equivalent to one dollar.
In our next article, we shall be discussing the other types of Lot Sizes and how Lot sizes are calculated. Keep an eye on this space for more.
Stay tuned for part 2.
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