What is a lot in Forex?
A lot is a term used to describe the standardized number of units of a traded asset. Currency pairs are the most common assets traded in lots throughout all financial markets because trading currency in lots is much easier than trading individual currency units. The change of price of one currency compared to another is called a point, and this amount is extremely small. Let’s face it, hardly anyone would be interested in trading a single currency pair because it’s impossible to profit from selling it alone. So trading assets in lots is useful when you want to get significant profit from trading them.
In this article, you’ll learn how trading in lots works, what types of lots there are and how to calculate profit and losses from trading in lots.
How does a lot work?
Market players use lots for purchasing and selling financial instruments. Traditionally for the stock market, 100 shares comprise one lot (a round lot). In fact, round lots can have numbers of shares that can be divided by 100.
However, there are also odd lots and mixed lots. Odd lots have less than 100 shares, and mixed lots have more than 100 shares, but whatever number it is, it cannot be divided by 100.
When trading, an individual can choose a lot size they can offer since buying one full lot can sometimes get too expensive. For instance, a stock lot equals 100 shares. A lot of this size is called a round lot. But you don’t have to purchase the whole round lot. Instead, you can buy any number of shares from that lot going for a 0.5 lot, 0.1 lot, or even 0.01 lot.
More information on lots is available in this video lesson by the FBS analyst team.
Types of lots
Bond market lots
Dominated by institutional investors, the bond market allows them to buy debt from bond issuers in large sums. Typically, a lot size for the bond market is $1 million; however, there can also be $100 000 lots.
Options market lots
As for options contracts, one option lot equals 100 shares. This type of standardization lets investors know the exact number of units they are buying with each contract. Without such standardization, trading options would be a much harder task.
Futures market lots
In the futures market, lots are called contract sizes. Anything can go as an asset for a futures contract: equity, a bond, interest rates, commodity, index, currency, etc. For that very reason, a contract size will vary according to the type of the traded contract.
Unlike stocks or bonds, the standard futures and options lot size is fixed and non-negotiable. But if you are trading forward contracts, which, unlike futures contracts, are traded over the counter, you can customize the lot size because those are non-standardized contracts created by the parties involved without an intermediary between them.
Forex lots are divided into three lot sizes: micro, mini, and standard. A micro lot in Forex is 1000 of the base currency pair; a mini lot contains 10 000; a standard lot is 100 000. When trading currencies via the Forex market, the smallest trade size will be 1000.
Lots and leverage
Since currency pairs are only sold in lots, even buying a micro lot would cost a trader quite a big sum of money, not to mention buying a standard lot. Does it mean that traders have to deposit $100 000 to their account in order to be able to buy a standard currency lot? No, it’s not necessary because this is when leverage comes into play.
Leverage is a trading strategy that allows traders to borrow money from their brokers and open positions larger than they can afford with their cash alone. Forex traders use leverage especially often as Forex leverage is significantly higher than leverage in other markets.
In a broader sense, leverage is the ratio between your money and the money you borrow from your broker. The money you deposit into your account is a small part of the funds that you can actually spend on trading. For example, with the leverage ratio of 1:100, you can deposit $100 and trade $10 000 worth of assets. So you can see how leverage can help you buy bigger Forex lots.
As we already learned, lot sizes depend on the type of asset a trader buys. Stock option lots control 100 shares, while in Forex one lot can contain from 1000 to 100 000 units.
For example, if a trader wants to buy 453 000 units of a currency pair, then he or she would buy 4 standard lots, 5 mini lots, and 3 micro lots.
In stock trading, traders can buy odd (less than 100 shares in one lot) or mixed lots (more than 100 shares in one lot). A mixed lot order consists of standard lots and odd lots. So if you want to buy a mixed lot of 598 units, you’ll need to buy 5 standard lots of 100 shares and one odd lot of 98 shares.
How to calculate a lot size
When buying a lot, it’s important to know how much of the asset you get in the end, especially when it comes to Forex trading. In order to calculate a lot size, you need to multiply the exchange rate of the currency pair by the trade volume. For example, you decide to buy a mini lot of EURUSD. The current exchange rate is $1.1. Since the lot contains 10 000 units of the pair, the amount you have to pay for it is $11 000.
But you usually don’t need to calculate your lots since your trading platform can do that for you.
How do I calculate profit and loss?
As it is, the amount of profit you get or loss you incur depends on the size of your lot and the number of points your currency pair price has moved. Points register really small price movements, which usually amounts to a difference of 0.00001.
So if the price of your currency pair went from $0.94850 to $0.95060, it jumped 210 points. If your lot includes 100 000 units, then your profit equates to $210 (0.0021 * 100 000). But if the price changed for the less and went from $0.94850 to $0.94760 (-90 points), then you suffered a total loss of $90 (-0.0009 * 100 000).
When you want to enter a trade, don’t forget about the spread. The spread is the difference between ask and bid prices. The ask price is the lowest price a seller is willing to take for an asset. The bid price, on the other hand, is the highest price a buyer is ready to pay for that same asset.
So if the price quotation for a currency pair is currently $1.345 / $1.351, a buyer would pay $1.351 per unit while a seller would receive $1.345. The $0.006 difference between the ask and the bid prices is what the market maker gets as a commission. You need to keep in mind this difference when you decide to trade, especially if you trade big amounts of units in lots.
How can I start trading on Forex?
Now that you know about lots and how Forex trading works, you might be wondering how to start trading on Forex.
- Register and open your trading account. You need an account to deposit your money. FBS offers multiple types of trading accounts, so go ahead and pick the one that suits you the most.
- Choose a trading platform. Trading platforms, like MetaTrader and FBS Trader, offer various tools and analytical patterns that can help traders plan a successful trading strategy.
- Open your first trade. Choose a trading instrument and place a trade.
- Learn how to analyze the market. Make sure you understand how the markets work, what patterns are useful to you, and what tools you can use to predict the direction of price movement and maximize your profit.
- Be mindful of risks. Never open a trade without considering how you can minimize your risks. Some tools like Stop Loss orders can help you control your trades.
With this simple advice in mind, you’re ready to take your first steps in the Forex trading world.
What is a lot in trading?
A lot is the standardized number of units of a traded asset. The number of units contained in one lot depends on the asset traded. In Forex, one standard lot equals 100 000 base currency pairs.
What is the maximum lot size in options trading?
In options trading, the maximum lot size controls 100 shares. However, it’s also possible to trade mini stock options, which include the amount of 10 shares.
How much is one lot in Forex trading?
A standard lot in Forex trading includes 100 000 base currency pairs. However, it’s also possible to buy a mini lot (10 000 units) or a micro lot (1000 units).
2023-03-03 • Updated