What is a LOT in forex?
A forex lot is a unit of measurement for trade size, with standard, mini, micro and nano lot sizes available for traders to control their exposure.
For those new to forex trading, one of the first concepts to understand is that of trading in lots. Lots are a standardised unit of measurement used to quantify trade sizes on forex exchanges, allowing individuals to trade the relatively small price movements of currencies more effectively. But why are lots necessary and what do different lot sizes mean for traders?
In the forex market, currencies are traded in pairs with prices quoted to four decimal places. The fourth decimal place measures the smallest unit of change in a currency's value against another and is known as a pip. As pips represent very modest price movements, trading single currency units would be largely ineffective. Lots were thus introduced to facilitate batch trading of these tiny price fluctuations in standardised amounts.
Leverage also plays an important role in determining appropriate lot sizes for forex traders. Leverage allows traders to gain greater exposure to the market without needing to put up the full capital for their positions. Most retail forex brokers offer leverage ranging from 30:1 up to 500:1 depending on the account type and country of residence. Higher leverage means traders can trade larger lot sizes while controlling the same pound amount in their account.
Traders now have a choice of four main lot sizes to suit different account sizes, risk tolerances and trading strategies: standard lots, mini lots, micro lots and nano lots. A standard lot equates to 100,000 units of a currency, while a mini lot represents just 10,000 units. Micro and nano lots enable even smaller trades of 1,000 units and 100 units respectively.
As an example, if trading a standard lot on the EUR/GBP currency pair with the euro priced at €0.8800, a single pip movement (€0.8801) would be worth £10. Trading a nano lot on the same currency pair, a pip would only be valued at £0.01. This demonstrates why lot sizes matter - they provide control over your trading exposure.
The lot size chosen by a trader impacts the monetary value of a pip movement as well as the potential profits and losses.
