In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are combines into different tradable sizes, and they are called as ‘Lots.’ Hence, to buy and sell currency pairs, you must trade in the form of lots. There are different lot sizes depending on the number of units you trade. For example, 10,000 units are referred to as a mini lot and 100,000 units as a standard lot. Now, in this lesson, we shall understand other lot sizes along with some examples.
What is a lot in Forex?
A lot in Forex is the number of units of a currency pair. Note that one unit is not equal to one lot. Instead, a collection of units of a currency pairs make a lot. And depending on the number of units that are involved in making up a lot, there are different lot sizes in the market.
Different Types of Lots in Forex
Depending on the number of units, we can classify Lots in four types.
The size of this lot is 1 and is made up of 1000,000 units of a currency pair. So, buying 100,000 units of EURUSD is as good as saying you have bought 1 lot of EURUSD.
In terms of lot size, the quantity of ‘lots’ in a mini lot is 0.1. And one mini lot consists of 10,000 units of a currency pair.
The quantity of lots in a micro lot is 0.01. And this lot is made up of 1,000 units. So, buying is 1 micro lot means, buying 0.01 lots or 1,000 units.
0.001 lots make up one nano lot, and it consists of 100 units of a currency pair.
Now, let us take some examples and clear out the differences in these types.
E.g., 1: Buying 5 standard lots.
Lot size distribution = 5 * 1 standard lot
Number of units = 5 * 100,000 = 500,000 units
E.g., 2: Selling 1.5 standard lots
Lot size distribution = 1 * 1 standard lot + 5 * mini lots
Number of units = 1.5 * 100,000 = 150,000
E.g., 3: Buying 3.2 mini lots
Lot size distribution = 3 mini lots + 2 micro lots
Number of units = 3.2 * 10,000 = 32,000
You must have seen brokers who let traders trade with as low as $100. In fact, they let you trade mini lots with it. Now, you must be wondering how one can trade 10,000 units with just $100 in their account. Well, this is facilitated by the brokers as they offer to trade with ‘leverage.’
In leverage trading, brokers let you take positions larger than the capital you possess. And as far as the mechanism of this is concerned, a broker lends you with the required money to take a position. And for this, they keep some amount of your capital as deposits. This deposit stays with them until your trade is open. When the trade is closed, the complete deposit is returned back to you. Leverage, also referred to as margin, is usually measured in ratios or in percentages. A detailed explanation of this shall be discussed in further lessons.
Hence, this completes the lesson on Forex lots and its types. And below is a quiz to help you check if you have grasped the concept better.