Communicated Content- Many investors are turning to Forex trading to gain lucrative earnings and even multiply the capital they initially put in when trading. This phenomenon led to a record-high 40% increase in the daily Forex trading turnover. The worldwide exchange market recorded $6.6T over the last decade.
If you want to hit profitable trades and high returns in Forex trading, you need to master the basics first. You may encounter common jargons in the industry like “lots” and “lot sizes” upon searching articles online regarding Forex.
Having a good background regarding these concepts is crucial before proceeding and delving deeper into trading stocks and currencies. This guide will define a lot in the context of trading and explain its types and corresponding sizes.
Lot in Forex Defined
Understanding what a lot represents in Forex is among the fundamental knowledge that traders must learn before engaging in more advanced transactions. Being able to define lots can help investors be more mindful of their current position and develop better risk management practices.
Lots mainly deal with how currency pairs are traded. Lots represent the currency pairs being traded. They equate to the amount of the currency pairs that a trader is buying or selling.
Why are lots used? The system of using lots as the number of trades in Forex is meant to redress some of the traditional trading mechanisms’ shortcomings. About decades ago, Forex was not that flexible as it only offered one contract size of about 100,000 units.
But due to technological advancements and the democratization and decline in transaction costs, Forex brokers are able to develop lots. Lower contract sizes then become available, marking the birth of varying lot sizes.
As a summary, lots pertain to the amount of the currency pairs that you will trade. Lots directly correlate with the amount of risk you will take in return for an investment. Thus, traders must exercise their skills in calculating LOT in Forex to keep their balance in check and manage their risks.
Lot Sizes: What Are They?
Lot sizes are established and conventional amounts of lots. Others often refer to lot sizes as similar to lot types. Determining your lot size can help you identify your position size and evaluate the risk to be taken. Below are the four significant types of lot sizes.
1. Standard Lot (100,000 Units)
A standard lot is equivalent to 100,000 units of the base currency. From the name itself, it is the usual size typically used by traders. In the context of USD, a standard lot amounts to $100,000. The standard lot is the same for all currencies.
Veteran and beginner traders alike have become accustomed to trading using this amount because it is usually the safest. Another is that you do not necessarily need to have a whole $100,000 in your account to trade using this size because of the leverage in Forex.
2. Mini Lot (10,000 Currency Units)
With a similar principle used to explain the standard lot, one mini lot is equal to 10,000 units of the base currency. This analogy makes one mini lot amount to $10,000.
Mini lots are considered ideal choices for traders who seek zero to no leverage in trading. Experts suggest that traders should contain at least $1,000 in their accounts beforehand when trading with mini lot sizes.
3. Micro-Lot (1,000 Units)
Micro lots are another option in trading, and they amount to 1,000 units of the base currency. Examples are $100,000 in USD and ¥100,000 in JYP.
This lot size can serve as great stepping stones for beginners who are still anxious to shell out money and take on risks in Forex. Trading institutions also use this size, or nano lots, in their demo accounts.
4. Nano Lot (100 Currency Units)
Some pages have not yet recognized nano lots as an official type. But nano lots are the smallest sizes, amounting to only 100 currency units of the base currency. Just like the previous examples, one nano lot is only $100.
Although this size is highly affordable, it is rare to see traders putting this value in their investments. Much like micro-lots, nano lots are good starting points when entering the Forex industry. Choose nano lots if you do not have enough disposable money to afford mini to standard sizes.
What Is the Best Lot Size?
There is really no “best” lot size. A Forex lot size depends on many factors, including the amount you are capable of trading and the risk you are willing to endure. The initial step would be to determine the value of these factors and choose your size.
While Forex is indeed a flourishing and booming market, it is riddled with risk investments. Hence, it begs for self-discipline and self-learning among traders willing to be part of the industry.
