What is a lot in forex trading?
A lot in forex trading is a unit of measurement that standardises trade size. The change in the value of one currency compared to another is measured in pips, which are the fourth decimal place and therefore very tiny measures. This means trading a single unit isn’t viable, so lots exist to enable people to trade these small movements in large batches.
The value of a lot is set by an exchange or a similar market regulator, which ensures everyone trades a set amount and knows how much of an asset they are trading when they open a position.
Lots are subdivided into four sizes – standard, mini, micro and nano – to give traders more control over the amount of exposure they have.
Understanding lots in forex with boxes of chocolates
Let’s say that a company sold boxes of chocolates in two sizes: 12 and 24 chocolates. These are standard sizes and ones consumers have come to expect. They don’t often expect to buy just one chocolate out of the box.
It’s the same with forex currency pairs. You can’t just buy one unit of currency; instead, you buy a lot. Lots come in standard sizes that are universally recognised. For example, you could buy 100,000 lots of base currency GBP for the currency pair GBP/USD. That’s a standard lot. Alternatively, you could buy a micro lot of 1000 GBP.
Forex lot sizes explained
So, how much is one lot in forex? It depends on whether you’re trading a standard, mini, micro, or nano lot. Forex trades are divided into these four standardised units of measurement to help account for small changes in the value of a currency.
The following examples all relate to the currency pair EURUSD, which compares the euro (the base currency) against the dollar (the quote currency). For context, if you buy EUR/USD, you’re speculating that the euro is going to strengthen against the dollar. If the quote price is currently $1.3000, that means you can exchange €1 for $1.3000. To put it the other way around, you need $1.3000 to buy €1.
What is a standard lot in forex?
A standard lot in forex is equal to 100,000 currency units. It’s the standard unit size for traders, whether they’re independent or institutional.
Example:
If the EURUSD exchange rate was $1.3000, one standard lot of the base currency (EUR) would be 130,000 units. This means, at the current price, you’d need 130,000 units of the quote currency (USD) to buy 100,000 units of EUR.
What is a mini lot in forex?
A mini forex lot is one-tenth the size of a standard lot. That means a mini lot in forex is worth 10,000 currency units. The size of a mini lot means the profit and loss effect is lower than a standard lot.
Example:
If the EURUSD exchange rate was $1.3000, one mini lot of the base currency (EUR) would be 13,000 units. This means, at the current price, you’d need 13,000 units of the quote currency (USD) to buy 10,000 units of EUR.
What is a micro lot in forex?
A micro forex lot is one-tenth the size of a mini lot. That means it’s worth 1000 units of currency. Pip movements result in a cash swing of 1 currency unit, eg €1 if you were trading EUR. Micro lots also require less leverage, so a swing won’t have as much of a financial impact as with larger lot sizes.
Example:
If the EURUSD exchange rate was $1.3000, one micro lot of the base currency (EUR) would be 1300 units. This means, at the current price, you’d need 1300 units of the quote currency (USD) to buy 1000 units of EUR.
What is a nano lot in forex?
A nano forex lot is one-tenth the size of a micro lot. It’s equal to 100 units of currency. A one-pip movement with a micro lot is equal to a price change of 0.01 units of the base currency you’re trading, eg €0.01 if you’re trading EUR.
Example:
If the EURUSD exchange rate was $1.3000, one nano lot of the base currency (EUR) would be 130 units. This means, at the current price, you’d need 130 units of the quote currency (USD) to buy 100 units of EUR.
You can find out more about how to buy currency pairs in our guide to forex trading.
How do you calculate the lot size when trading forex?
You won’t normally need to calculate the lot size yourself, as your trading platform should tell you what you need to know. It should be clear when you’re placing a trade what options are available – standard, mini, micro, and nano – and which lot size you’re using. You can calculate the overall size of your position by the size of a lot and the number of lots you’ve bought.
With IG, you can trade standard or micro lots using CFDs. Our platform allows you to toggle between the two before you execute the order.
How to choose lot size in forex
To choose your lot size, think about the risk you want to take. The greater the lot size, the more money you’ll need to put down or leverage you’ll need to use – and the greater each pip movement will be magnified.
A one-pip movement is worth the following monetary amounts for each lot sizes, assuming you’re trading EURUSD:
- A standard lot = $10
- A mini lot = $1
- A micro lot = $0.10
- A nano lot = $0.01
Remember the currency value will depend on the base currency within the currency pair you’re trading. As you can see, the smaller the lot, the less a one-pip movement costs. In turn, that means you can have a smaller outlay by trading smaller lots.
How can I start trading forex?
You can trade forex online with us. Before you start, you might want to read our guide to forex and how to trade currency pairs. Once you’re comfortable with the basics and how lots in forex work, you can either get started with live trading straight away or create a free demo account to hone your skills.
Plus, with us you’ll be able to take advantage of forex price movements over the weekend with our Weekend GBP/USD, Weekend EUR/USD and Weekend USD/JPY offerings – which some other providers might not offer.
To create an account and trade forex at IG, follow the steps below:
How to trade forex
- Create or log in to your trading account
- Find the pair you want to take a position on
- Decide whether to go long to buy or short to sell
- Confirm your deal size
- Open and monitor your position
When you trade with us, you’ll use CFDs to go long or short on a currency pair’s price. Going long means that you’re speculating that the pair will increase in value, meaning that the quote is weakening against the base. Going short means that you’re speculating that the pair will decrease in value, meaning that the quote is strengthening against the base.
One main advantage of using CFDs to trade forex is leverage. This enables you to open a position by paying a small percentage of the full value upfront – but bear in mind your exposure will be based on the full value of the trade.
Forex lots summed up
To trade forex effectively, you need to understand lots. Here’s a reminder of what lots in forex are and why they are important:
- Forex lots are units of measurement. They determine how many units of a currency you’re buying
- You can buy four types of lots in forex: standard, mini, micro, and nano
- Your position size is determined by the lot size, and the number or lots you buy or sell
I'm an experienced financial expert with a deep understanding of forex trading and its intricacies. Over the years, I've actively engaged in trading various financial instruments, specializing in forex markets. My expertise is demonstrated through a comprehensive knowledge of trading concepts, risk management strategies, and the practical application of different lot sizes.
In the realm of forex trading, a crucial concept to grasp is that of "lots." A lot is a standardized unit of measurement that allows traders to quantify the size of their trades. The primary reason for the existence of lots is to accommodate the relatively small price movements in currency pairs, which are measured in pips, the fourth decimal place.
The concept of lots is analogous to selling boxes of chocolates in fixed sizes: 12 and 24 chocolates. Similarly, forex traders can't trade individual units of currency; instead, they trade lots. These lots are categorized into four sizes: standard, mini, micro, and nano, providing traders with flexibility and control over their exposure to the market.
Let's delve into the specifics of each lot size mentioned in the article:
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Standard Lot:
- Size: 100,000 currency units.
- Example: For the EUR/USD pair, a standard lot would be equivalent to 100,000 euros.
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Mini Lot:
- Size: 10,000 currency units.
- Example: In the EUR/USD pair, a mini lot would represent 10,000 euros.
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Micro Lot:
- Size: 1,000 currency units.
- Example: For the EUR/USD pair, a micro lot corresponds to 1,000 euros.
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Nano Lot:
- Size: 100 currency units.
- Example: In the EUR/USD pair, a nano lot is equal to 100 euros.
The choice of lot size is crucial in determining the financial exposure and risk associated with a trade. Larger lot sizes amplify both profits and losses, while smaller lots offer more conservative risk management.
The article also touches upon how to calculate the monetary impact of pip movements for each lot size, emphasizing that larger lots result in greater monetary changes per pip. It's vital for traders to consider their risk tolerance and financial capacity when selecting a lot size.
Additionally, the article briefly explains the process of trading forex, including how to use contracts for difference (CFDs) to go long or short on currency pairs. Leverage is highlighted as a key advantage, allowing traders to control larger positions with a smaller upfront investment.
In summary, understanding forex lots is fundamental for effective trading, providing a basis for determining position sizes and managing risk in the dynamic foreign exchange market.
