In the world of Forex, a lot is a basic unit of measurement to determine the size and scale of one’s particular trade. It is quite common to hear people talk extensively about their lot sizes and how many lots they are planning to buy or sell of a particular currency pair. Any time you place an order with your favorite broker, your order will be shown as a lot size of a certain amount depending on what size you are trading.
One easy way to think about all of this is to imagine what it is like when you enter your favorite grocery store to purchase your items for the week. You very likely purchase some items in certain familiar quantities. For example, most people purchase a loaf of bread with about 20 slices in it. You don’t purchase a single slice of bread because a loaf has been determined to be the proper lot size for this specific item. Likewise, it is common for people to purchase certain lot sizes of their currencies as well.
|Standard Lot||100,000 units|
|Mini Lot||10,000 units|
|Micro Lot||1,000 units|
|Nano Lot||100 units|
You can see here that the thing that traders refer to as a standard lot is a trade of 100,000 units of the given currency pair. Of course, not all traders have the funds to make those size trades (or they simply don’t want to), and they may choose to trade in nano-lots, micro-lots, or mini-lots instead.
Movement In Pips
At this point, many readers are already aware of the fact that currency pairs move in units known as pips. These are tiny fractions of movement that each currency may move in throughout the course of the trading day. Obviously, those who are trading their own funds would not see that much of a change in their fortunes unless they are trading in considerably large amounts of money. In other words, a trader placing an investment in the AUS/USD will not see much movement in the value of their trade unless they are trading 50,000, 100,000, or even more units worth of that currency.
To make Forex trading worthwhile at all, it is necessary to trade with an extensive amount of money. The good news on this of course is that the trader him or herself does not need to front the full amount of currency they would like to trade. Rather, they need only to provide some fraction of that full amount. The remainder of the amount that they seek to trade can be obtained from the broker itself via something known as margin.
How Much Does a Single Pip Impact One’s Account?
The big question most traders have is how much can the small movement of just a few pips in a given currency pair impact the true value of their account? How much can they expect to profit (or loss) from a currency pair moving around in natural and predictable ways?
The amount of money that moves through an account depends on the lot size that one is trading and how many lots they are holding.
|Pair||Unit||Lot||Mini Lot||Micro Lot||Nano Lot|
A standard lot would see an investor making or losing $10 per every pip that the currency moves. If they buy the currency pair and it increases in value, then so does the value of their account, $10 for every pip in their direction. Conversely, if the currency trades down in value, their account will lose $10 per every pip that it has moved against them. These gains or losses exist only on paper until the trade is exited. At that moment, the profits or losses become realized, and the trader can state affirmatively that they either gained or lost a certain amount of money on the trade based on those factors.
How To Use Leverage to Trade Larger Lots
The amount of money that a novice trader has to throw into their Forex account may be just enough to trade a few nano lots in their preferred currency. However, leverage gives them the opportunity to potentially trade much higher than that. Virtually any good broker will allow their traders to trade on leverage.
What this means is that the investor puts down just a small amount of money, perhaps as little as $1,000 for example, but they are granted leverage to trade up to 50 times the amount that they have deposited (this amount could be more or less depending on the broker).
The $1,000 that the trader deposited now gives them the opportunity to trade up to as much as $50,000 worth of a currency pair. That is 5 mini-lots worth or one-half of one standard lot (depending on how you want to look at it).
Leverage means that trades can start to realize larger gains or losses depending on how well they do with trading. It opens them up to the potential to make considerable money while not having to deposit all that much to get started.
All traders should be aware that while leverage is part of the Forex trading market, it should be used very carefully. It is easy to hit a big score with leverage to be sure, but it is also fairly easy to lose a lot of money as well. You don’t want to become over confident in your ability to make good trades and lose your entire account because you took out too much leverage and now it is coming back to bite you. That does happen, and people should be aware of the dangers.