What is lots in forex trading ?

In the Forex market (FX), a lot is commonly traded in specific amounts or, in the simplest terms, the number of currency units you will be purchasing or selling.

A lot is defined as a unit of measurement for a specified transaction amount.

On the trading platform, orders are placed in sizes that are quoted as lots. It’s similar to an egg carton or an egg box. Usually, when you buy eggs, you will purchase them in a carton or box, and one carton includes 12 eggs.

The standard lot size is 100,000 units of currency. Besides, there are mini (10,000), micro (1000), and nano (100) lot sizes.

LOT	NUMBER OF UNITS
Standard	100,000
Mini	10,000
Micro	1,000
Nano	100

A few brokers show quantity in lots while others display it in the actual currency units.

As we previously discussed, the variation in the currency value relative to another is measured in pips, which is a very, very small percentage of the currency value unit.

In order to take advantage of these frequent value changes, you need to trade huge amounts of this particular currency and observe the significant profit and loss value.

Let’s consider we will use a 100,000 standard unit lot size. Hence, we will recalculate a few examples to observe how the pip value affects them.

1.       USD/JPY at an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip

2.       USD/CHF at an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip

The formula is a bit different in a few cases where the US dollar is not quoted first

1.       EUR/USD at an exchange rate of 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip

2.       GBP/USD at an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

Depending on the lot size, here are a few examples of PIP values for EUR/USD and USD/JPY currency pairs:

PAIR	CLOSE PRICE	PIP VALUE PER
		Unit	Standard lot	Mini lot	Micro lot	Nano lot
EUR/USD	Any	$0.0001	$10	$1	$0.1	$0.01
USD/JPY	1 USD = 80 JPY	$0.000125	$12.5	$1.25	$0.125	$0.0125

Your broker might have a different understanding of calculating PIP values in comparison with the lot size, but whatever way they perform, they will exactly tell you what the pip value for the currency you are currently trading is at a specified time.

Along with the market movement, the pip value is based on what currency you are trading recently.

What exactly is Leverage?

You might be wondering how a small investor can trade such a huge amount of money.

Just assume that your broker is a bank who primarily helps you purchase $100,000 in currency.

However, all the banks will ask you to provide $1000 as a good faith deposit, which they will reserve for you.

Is that sound true? This is how the Forex market's trading using leverage works.

The leverage amount you use will be basically dependent on your forex broker. However, a broker must require a deposit, which is referred to as margin.

Once the money is deposited, then you are capable of doing trade. The broker will also specify how much margin is needed per lot or position traded.

Take an example: if the allowed leverage is 100:1 or 1% of the lot or position, and you wish to trade a lot or position worth $100,000 but you only have $5000 in an account.

Your broker would set aside $1000 as a deposit and the remainder of the loan amount.

But of course, any profits or losses will be reduced or further added to the remaining cash balance in your bank account.

The minimum security margin for each lot will differ from broker to broker.

In the above example, the broker needed a 1% margin. It means that for every $100,000 traded, the broker requires $1000 as a deposit for that particular position or lot.

Let’s give an example: you wish to purchase 1 standard lot (100,000) for the USD/JPY currency pair and your account is allowed to 100:1 leverage, then you need to keep $1000 as a margin.

Here, the $1000 is not considered as a fee but it is a deposit.

The main reason why the broker needs the deposit is that when the trade is open, there might be a threat that you could lose money on that position or lot.

Just assume that the trade of the USD/JPY currency pair is the only position that remains open in your account. Hence, you need to manage your account’s equity (i.e., $1,000 at all times) in order to keep your trade open.

If the USD/JPY pair collapses and your trade losses because of the account equity falling below $1000, then the broker system will be automatically closed to prevent additional losses.

This is one of the safety measures to avoid your account balance going negative.

It’s really important to understand how the margin trade works; this will be discussed in our next lesson. If you do not wish to blow up your account, you must study how this margin trading works.

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