What is a Lot in Forex? – FX Guide
When it comes to Forex, you sometimes need to buy a whole lot of something for it to be valuable. To manage a significant portfolio, you will be trading much more than $25 a day. That even could have significant financial implications for you. A minor fluctuation includes choppy markets since the central bank of Kenya is evaluating how to respond to the pandemic.
In some ways, forex lots are a solution to this problem. They are ways to standardise large quantities of assets, rather than just vaguely referring to “a bunch of money.”
Forex Kenyan traders need to understand the concept of lots to trade currency pairs. The following guide will describe what a forex lot is, how it affects your position size and why it’s important. Here, we’ll explain what is a lot in Forex, how to calculate their size, and what you should do when you have this data to make your trades even better.
What is Lot?
It is a unit of measurement used to standardise trade size in forex trading. Pips, which are the fourth decimal place, are tiny measurements representing the change in the value of one currency compared to another. Consequently, trading a single unit isn’t feasible, which is why people trade lots to trade these small movements in large quantities.
Exchanges and similar market regulators set the value of a lot to ensure all traders are trading the same amount when they open a position and know how much of an asset they are trading.
To give Kenyan traders a better idea of how much exposure they have, lots are divided into four sizes: standard, mini, micro, and nano.
Understanding forex lots
As an example, a chocolate company sold 12 and 24 chocolate boxes. It’s nearly standard for consumers to purchase chocolates in these sizes. However, it is unusual for them to buy one chocolate from a box.
Forex currency pairs work the same way. A lot of currency can’t be purchased with just one unit. Lot sizes are standard and universally recognised. If you want to buy 100,000 lots of GBP/USD, you could buy 100,000 lots of base currency GBP. That’s the standard lot size. Another option is to buy a micro lot of 1,000 GBP.
Types of lots (securities trading)
Institutional investors purchase bond securities in large sums from bond issuers, largely dominating the bond market. It is common for some circles to consider a $1,000,000 round lot for U.S. government and corporate bonds. As an example, municipal bonds can be worth $100,000.
An investor or trader doesn’t have to buy bonds in that quantity. The face value is typical $1,000 to $10,000 (some bonds have a lower value). Investors can buy as many bonds as they like, but the combination will still be odd.
The number of contracts contained within one derivative security is called a lot in options terms. Equity option contracts represent 100 underlying shares of the company’s stock. Each option contract corresponds to 100 shares.
Last month, one call option was purchased by an option trader at Bank of America (BAC). A $24.50 strike price is set in the option, and it expires this month.
BAC currently trades at $26.15 per share, so the call option holder can purchase 100 shares of BAC at a strike price of $24.50, as outlined in the contract. In one option contract, the company is allowed to buy 100 shares at the agreed-upon price.
Based on standardization, investors can determine what price per unit they are paying since they always know how many units they’re buying with each contract. A lack of standardisation would make valuing and trading options too complicated and time-consuming.
Investors typically trade one contract, or 100 shares, as the smallest options trade. Alternatively, mini-stock options are available with an underlying share amount of 10 and can be traded for a smaller amount.
The size of a contract in the futures market is called a lot. For example, futures contracts could be backed by equity, a bond, interest rates, commodities, indexes, currencies, etc. Due to this, contract sizes differ depending on the type of contract traded.
For example, one futures contract of oats, soybeans, or corn has a lot size of 5000 bushels in a commodity. An individual Canadian dollar futures contract is worth 100,000 CAD, an individual British pound futures contract is worth 62,500 GBP, an individual Japanese yen futures contract is worth 12,500,000 JPY, and an individual euro futures contract is worth 125,000 EUR.
Standard contract sizes for options and futures are not negotiable, unlike stock, bond, and ETF orders that can be bought in odd lots. Since forward contracts are not standardised, derivatives traders can customise the contract or lot sizes since they are non-standardised agreements created with the parties involved.
Standardised lots can increase liquidity in the financial markets because the exchange sets them. As liquidity increases, spreads decrease, creating a more efficient process for everyone.
Standard, mini, and micro-lots are available when trading currencies. Micro lots are 1,000 units of the base currency, mini lots are 10,000, and standard lots are 100,000. When trading through a foreign exchange broker, the smallest trade size is typically 1,000 unless otherwise stated. Therefore, you may exchange currencies at a bank or currency exchange for less than 1,000.
Forex lot sizes explained
How much does a lot of Forex cost? There are different types of lots depending on whether you are trading a standard, mini, micro, or nano. To help account for changes in the value of a currency, Forex trades are divided into four standardised units of measurement.
Below are a few examples of the currency pair EURUSD, which compares the Euro (the base currency) to the dollar (the quote currency). In other words, if you buy EUR/USD, you are speculating that the Euro will strengthen against the dollar. For example, you can exchange €1 for $1.3000 if the quoted price is currently $1.3000. In other words, to buy one Euro, you need $1.3000.
What is the standard lot in Forex?
In Forex, a lot equals 100,000 currency units. There’s no difference between independent and institutional traders in using this unit size.
In the case of the EURUSD exchange rate of $1.3000, a standard lot would be 130,000 units of the base currency (EUR). Therefore, at the current price, 100,000 units of EUR would cost 130,000 units of the quoted currency (USD).
What is a mini-lot in Forex?
Mini forex lots are ten times smaller than standard forex lots. Each mini lot is equivalent to 10,000 currency units. As a result, mini lots have a lower profit and loss effect than standard lots.
In the case of a EURUSD exchange rate of $1.3000, that would mean 13,000 mini lots in the base currency (EUR). Therefore, at the current exchange rate, you would need 13,000 USD to purchase 10,000 EUR.
What is micro-lot in Forex?
In Forex, a micro lot is ten times smaller than a mini lot. Each micro lot consists of 1000 units of currency. Whenever you trade one pip, you are trading one currency unit, for example, one Euro if you are trading EUR. A swing in the value of a micro lot will also be less significant than with a larger lot, as they require less leverage.
A micro lot of one Euro (EUR) would be 1300 if the EURUSD exchange rate were $1.3000. Therefore, you need to purchase 1000 units of the quoted currency (USD) at the current rate to buy 1300 units of EUR.
What is a nano-lot in Forex?
Nano forex lots are 10 times smaller than micro-lots. One nano lot equals 100 micro-lots. When you trade a micro lot, one pip equals 0.01 units of the base currency you are trading, for example, €0.01 when trading EUR.
A nano lot (130 units) of EURUSD is equivalent to one unit of the base currency (EUR) at a $1.3000 exchange rate. Accordingly, you would need 130 units of the quoted currency (USD) to purchase 100 units of EUR at the current price.
Do you know how to calculate the lot size when trading Forex?
As your trading platform should let you know the lot size, you shouldn’t need to calculate it yourself. Instead, when you place a trade, you should see what options are available – standard, mini, micro, or nano – and what lot size you are using. Then, calculate your overall position by looking at how many lots you’ve purchased and the size of the lots.
Kenyan brokers allow you to buy and sell CFDs with standard or micro-lots. Using their platforms, you can select either before executing the order.
How to choose the lot size in Forex?
Think about your risk tolerance when choosing your lot size. When you trade with a larger lot size, you’ll have to put down more money or use more leverage, and every pip movement will be magnified.
The following monetary amounts are associated with a one-pip movement for each lot size, assuming you are trading EURUSD:
- A standard lot = $10
- A mini lot = $1
- A micro lot = $0.10
- A nano lot = $0.01
Remember that the currency’s value will depend on the base currency for the currency pair you’re trading. It is obvious that the smaller the lot, the less expensive it is for a one-pip movement. This allows you to trade in smaller lots, which results in a lower outlay.
How much money do you need to trade Forex?
Forex is a less regulated market in Kenya than other markets, so brokerage firms usually set requirements such as minimum account sizes. As a result, it’s possible to trade Forex with as little as $100, but it’s a good idea to save up more and allow for some wiggle room in case of losses.
How do you calculate forex profit?
Measuring the movement of the pair is the first step in calculating forex profit. For example, you might trade a dollar-based pair that moves three pips in your favor or $0.30.
Calculate your profits based on your lot size and number of lots. When you trade two standard-size lots, you gain $0.30 on each lot multiplied by two lots times 100,000 units (2 x 100,000 x 0.3 = $60,000).
Lot size matters
A very important individual decision is selecting the lot size that will best balance opportunity and risk. Calculating the lot size based on your risk tolerance and trading objectives can be easier with the help of a risk management calculator.
A market move directly affects your account balance depending on the size of the trading lot. For example, if you are trading a small quantity, a 100-pip move will not be noticed nearly as much as trading a large quantity.
That is why choosing the right lot size is important. Trading with a lot size that is too large will increase the risk of the trade and make it difficult to hold onto. On the other hand, when the lot size is too small, the potential profit might not be enough to justify the investment.
How leverage impacts Lot size?
Leverage allows forex traders to manage more capital than they hold in their accounts. The benefit of this is that it can increase your profits dramatically – but it can also increase your losses if you’re unlucky and can even wipe you out of your account.
If you are trading with a standard lot (100,000 units) and have $2,000 in your account, that is a standard lot. So a pip represents a $10 change in the account. Normally, a move of 20 basis points, which can happen in a single day, will affect your account by $200. So your account balance changed by 10% today – just reacting to some pretty minor changes.
You can do this if your broker offers a leverage of 50:1 – this means you can invest 50 times as much as you can trade. Unfortunately, even though leverage can increase your profits multiple times, it can also increase your losses – and since you’re borrowing money, you’ll have to pay interest.
$2000 x 50 = $100000 (standard lot)
You need to understand a lot to trade Forex effectively. To understand what lots in Forex are and why they are important, here is a short reminder. The forex market of Kenya is measured in lots. Lots tell you how many units you’re buying. In Forex, you can buy four kinds of lots: standard, mini, micro, and nano.
Depending on the lot size and the number of lots you buy or sell, your position will vary. The amount under the control of a contract is fixed based on the contract size, so a trader can buy a futures contract as many times as they like. Options trade in micro, mini, and standard lots, while foreign exchange trades in 100 shares of the underlying stock.
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Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
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