Rewind a couple of decades ago – there was predominantly just one lot size that most brokers used in trading. It was a standard lot that comprised of 100,000 currency units. With time, however, technology made lives simpler and made it easier to process lots of different sizes in Forex trading as well. However, let’s not get ahead of ourselves out here. Let us first take a look at what are lots and what are the different lot sizes in Forex trading.
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What is a lot?
A lot is a standard used to refer to the number of currency units being traded in Forex. A lot is characterized by a bundle of a specific number of units, depending on its size. Meaning, you can only purchase lots in multiples of these bundles or the number of units that are present in each lot. For instance, say you go to the store to purchase a pack of cigarettes. Each pack consists of 20 cigarettes, so you can only purchase cigarettes in multiples of 20. So, coming back to our Forex Lot analogy, each lot can be compared to a pack, while each cigarette could be compared to individual currency units. When we say the number of currency units here, we are referring to the base currency.
If you were to place an order to trade 10 lots EUR/USD on your account, then it would translate to trading 1,000,000 currency units. The units refer to the base currency, and in this example, it would mean that you want to purchase 10 lots in EUR by selling the corresponding equivalent in USD. Now, that you understand how lots work, let us take a look at the different types of lots – micro, mini and standard lots.
A micro lot refers to the smallest available lots in Forex trading. Each micro lot consists of 1000 currency trade units in the base currency. Meaning the minimum position size that you can open is 1000 currency units. Micro lots are a good place to start if you are a beginner, as the risks associated with it are lesser. This way you can give risk management tactics a try while making sure that your monetary resources are not on the chopping block.
A mini lot refers to 10000 units in the base currency. It means every trade has 10 times the impact of its micro lot counterpart. These lots are popular amongst beginners and experienced traders alike. Seasoned Forex traders may choose a mini lot for their flexibility. They may also choose it if they are seeking out a lot smaller than the standard lot or looking to develop trading positions on set amounts.
Standard lots refer to lots with 100,000 currency trade units. If you are looking to trade in standard lots, then you should be prepared for the associated hefty monetary swings, whether it is a gain or a loss. You will also need to have a big account size before you start trading them. It is not uncommon to see gains or losses of the order $1k or $2k on each standard lot in just one day.
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Before closing, there are two points that you need to keep in mind. The profit or loss on currency position is affected by the size of the lot you choose. When you increase the lot numbers that you are trading, the risk associated with it automatically increases as well.