In Forex, a lot is the unit of measurement for the size of your trades. In another sense, a lot is the number of currency units you plan to trade in a Forex transaction. For example, say you want to purchase eggs from a shop. The eggs are packaged into half a dozen trays. The tray of six eggs is the normal lot size of eggs, assuming the shopkeeper does not sell one egg each.
In the same way, the forex market operates when trading using a lot size. You cannot purchase a single currency, but it can only be purchased in lots. For example, you cannot buy 1,000 euros exactly; instead, you can buy 1 lot, 2 lots, 0.01 lots, and so on. The basic lot size is 100 000 units of currency. However, smaller lots, known as mini, macro, and nano lots, are available for purchase.
Lot size classification
As previously stated, the forex market classifies currencies into standard, mini, micro, and nano lots.
In Forex, a standard lot is 100,000 units of the base currency. It’s the common unit size for independent and institutional traders.
If the rate of GBPUSD is 1.37654, for example, you’ll need 137654 base currency units to create a 1 lot position. To buy 100,000 pounds, you will need 137654 US dollars. The base currency is the one that is bought or sold in exchange for another. It is always the first word of a quote.
A mini lot is 10% of a standard lot in size. When you open a 1-lot trade on a mini lot FX account, instead of buying or selling 100,000 units of the base currency, you purchase or sell 10,000 units of the base currency. The mini-lot is advantageous because it requires less money to enter a deal, requiring a smaller deposit.
The EURUSD pair exchange rate is 1.1605 USD. The base currency is EUR, and the quote currency is USD. 1 mini lot of EUR will be 1160.5 units. This means that to buy 10,000 units of EUR at the current price, you’ll need USD 11605.
A micro forex lot is a tenth of a mini lot’s size. It is, therefore, worth 1000 units of money. If you were trading AUD, a pip movement would result in a cash swing of one currency unit. Micro lots also require less leverage. Thus a swing in the market will have a smaller financial impact than bigger lots.
The AUDUSD exchange rate is 0.7514. One micro-lot of AUD would be 751.4 units. Thus, means that to buy 1000 units of AUD at the present price, you’d need 751.4 units USD.
A nano forex lot is a tenth of a micro lot’s size. It’s the same as 100 units of currency. A one-pip fluctuation equals a price change of 0.01 units of the base currency you’re trading with a micro lot.
If the GBPUSD pair is trading at 1.37679, one nano lot of the base currency GBP would be 137.679 units. This means, at the current price, one will need 137.679 units of the quote currency USD to buy 100 units of EUR.
Calculation of lot size
The lot size is measured in pips which is a very small proportion of the value of a unit of money. To benefit from a minute shift in value, it is advisable that you trade huge volumes of a specific currency.
Reasons why one should calculate lot size
To get the optimal position volume in relation to deposit amount, considering the risk and expected reward.
To select the right lot size and deposit-increasing strategy so that the entire trading position can withstand pullbacks, price adjustments, price movement, and volatility.
USD as the quote currency formula
Lot size= Contract size × trade volume ×asset price
The GBPUSD has a contract size of 100 000. The pair is trading at 1.37375.
Lot size=100, 000×1.37375=$137375.
USD as the base currency formula
Lot size= Contract size × trade volume
Let’s take the example of USDCAD, which is trading at 1.23701. The contract size is 100 000. The trade volume is 0.01.
Lot value in USD=100 000×0.01=1000
Thus, if you have a trading volume of 0.01, 123701 CAD will be bought, and 1000 USD will be reserved by the broker.
No USD involved formula
Lot size= Contract size × trade volume × asset price ÷ quoted currency price
Let’s take the example of GBPAUD, which is trading at 1.83008. The contract size is 100000. The trading volume is 0.01 lot. GBP is the base currency here, and the exchange rate of USDGBP is 0.72774.
Lot size= 100 000×0.01×1.83008÷0.72774=2514.74 USD
The pip value for a full lot (a single trade)
|Lot Type||1 pip yields|
|Micro lot||10 cents|
|Nano lot||1 cent|
What is the significance of lot sizes?
The forex market is characterized by high risk and numerous profit chances. Even the most seasoned traders can find themselves on the wrong side of the market from time to time, resulting in losses. As a result, risk management is an important consideration before making any trades. Lot sizes assist you in managing your risk. Limiting the number of units of a currency you trade reduces the amount of money you risk losing if the market turns against you.
A lot size is the number of currency units you’re willing to trade with. The lot size is classified into standard, mini, micro, and nano. It is important to calculate lot sizes before entering any trade to minimize the risk of losing money. A larger lot size means more earnings, but it also means more risk.