What is a Lot Size in Forex?
What is a Lot Size in Forex
Lot size in Forex
Forex trading is held in terms of “Lots”. Hence, for every trader entering the world of Forex trading, it is important to understand the concept of a Lot. This will help them to conduct their trading properly and ensure adequate profits. Hence, before trading with Forex currencies, traders must ask themselves “What is Lot size”, and understand the concept thoroughly.
So, what is a Lot?
A Lot in Forex trading can simply be defined as a bundle of “units” or the size of the trade made by traders and investors. A standard Lot comprises of 100,000 units of the base currency being traded. In other words, a Forex trader can purchase and hold 100,000 units of a base currency when they opt for one Lot. The concept can become pretty clear if a simple example of beer is considered.
Beer cans or bottles are sold in packs of six. Whenever a person goes to a store to purchase beer, they can purchase as many packs of six beer cans as they want. However, they will not be allowed to purchase a set of three cans. The pack of six beers cannot be split under any circumstances. A Lot in Forex works in a similar fashion. The units of currency are collected together in a certain amount and called Lots. There are different sizes of Lots available for Forex traders to invest in. In order to invest in the desired Lot size, a trader must understand what Lot size is and determine which Lot size they wish to invest in.
What are the Different Types of Lot Sizes in Forex?
There are four different types of Lot sizes in Forex, although only three of them are prevalent in the current Forex trading market, while the fourth is not typically used. Forex traders have the liberty to trade in any of the four different lot sizes depending on their needs and desires. These different sizes include: Lot Size in Forex
1. Standard Lot Size
A Standard Lot size is the most commonly used among the four different types of Lot sizes. This Lot size holds 100,000 units of the base currency, and is assigned the value of 1.0. This value equals to 100,000 Dollars in trade if you are using Dollars as your base currency. The average size of a pip in the Standard Lot size is $10.
2. Mini Lot Size
Traders who are not always able to trade in the high values of the Standard Lot size often resort of trading in Mini Lots as this requires lesser money. This Lot size holds 10,000 units of the base currency, and is assigned the value of 0.1. This is equivalent of 10,000 units of currency with the size of each pip standing at $1.
3. Micro Lot Size
A Micro Lot size is often the smallest lot size available with several brokers for traders to avail. This Lot holds on 1000 units of your base currency. Hence, if you are trading with US Dollars as the currency funding your Forex trading account, a Micro Lot will allot you to trade with at most 1000 Dollars worth of the currency you choose to trade with. This Lot has been assigned the value of 0.01, causing the average size of a pip to fall down to 10 cents.
4. Nano Lot Size
This is a Lot size that is not very prevalent, with only a few brokers offering traders with an option to trade in this Lot size. This Lot only holds 100 units of your base currency. Hence, if you are trading with US Dollars as the currency funding your Forex trading account, a Micro Lot will allot you to trade with at most 100 Dollars worth of the currency you choose to trade with. This Lot size, however, has not been standardized yet in the Forex trading market, and may be different from one broker to the next.
Choosing a Lot Size in Forex
In order to determine the best Lot size for any Forex trade, you must have a clear answer to the question “What is Lot size”. You must also calculate the possible risks with the trade in terms of percentages. This will help you to choose a lot size that will not lose a lot of money in case the trade has to be closed for a loss. It is also important to understand the average pip cost and the average gain or loss per pip in case of a successful or unsuccessful trade. This will go a long way in choosing the best Lot size for making a Forex trade.