What is a Lot in Forex Trading?
We are often asked this question and, whilst not the most exciting topic to discuss, it is one that we thought important to write a quick guide about.
Beginner forex traders, in particular, would have no idea what a lot is and so this article is mainly for those starting their trading journey. Read on to find out more!
So, what is a Lot?
A lot in forex trading is best described as a “unit of measurement”, i.e. the number of currency units you will buy and sell when trading forex pairs.
When you go to place a trade, it is likely you will need to place an “amount” or “size” quoted in lots. This is not the same for all trading platforms, however those that focus on FX are mainly quoted in terms of lots.
Lots can be broken down into four sizes and here is an overview of each;
- Standard lot: 100,000 units of base currency
- Mini lot: 10,000 units of base currency
- Micro lot: 1,000 units of base currency
- Nano lot: 100 units of base currency
Allowing different lot sizes gives traders more control over the amount they are trading with.
A standard lot is the largest size and is equivalent to 100,000 units of the base currency. Due to their larger size (and risk), standard lots are for the more experienced traders with bigger-sized accounts.
Nano and micro lots are excellent for beginners and those not looking to risk too much money. Mini lots are somewhere in between – not big but not small trade sizes either!
Lot Size Examples
The following examples all relate to the GBP/USD currency pair, which compares the British Pound (the base currency) against the US Dollar (the quote currency).
If you buy GBP/USD, you are speculating that the British Pound is going to strengthen against the US Dollar. If you sell GBP/USD, you believe that the British Pound will weaken vs. the US Dollar.
If the GBP/USD exchange rate is $1.3500, then one standard lot of the base currency – GBP – would be 135,000 units. What does this mean? Well, at the current price of $1.3500, you would need 135,000 units of the quote currency (USD) to buy 100,000 units of British Pound.
If the GBP/USD exchange rate is $1.3500 and you wanted to buy a micro lot (1,000 units) of GBP, then you would need 1,350 units of the quote currency -USD – to buy 1,000 units of GBP.
If the GBP/USD exchange rate was $1.3500, one nano lot of the base currency (GBP) would be 135 units. This means that at the current price, you’d need 135 units of the quote currency (USD) to buy 100 units of GBP.
How Do You Calculate The Lot Size?
On most trading platforms, you will not need to calculate the lot size yourself. Instead, the platform will tell you everything that you need to know.
It should be obvious which options are available – you will need to choose either a standard, mini, micro or nano lot size. If you are confused, do not enter the trade!
You can calculate the overall size of your trade by the size of a lot and the number of lots you’ve bought.