Lot is an important term in Forex. If you read about trading, you’ll probably encounter this word; but not all beginners know exactly what it means. So, what is Lot? How does it affect your forex trading? This article will give you the basic definition of Lot and explain the different types of Lots that traders often use in Forex.
What is Lot?
Lot represents the size of your trades in Forex. In another interpretation, Lot is the number of currency units you will trade in Forex.
There are 4 main types of Lots: Standard Lot, Mini Lot, Micro Lot, and Nano Lot.
- Standard Lot: 1 standard lot is equivalent to the volume of 100,000 units. Whenever you purchase 1 lot of a currency pair, you buy 100,000 units of the base currency (the first currency in a pair). For instance, buying 1 lot of the EUR/USD means you buy 100,000 EUR. Another example is that you want to buy a currency pair EUR/USD at the exchange rate of 1.5 (1 EUR = 1.5 USD). Then, when you buy 1 lot of this currency pair (equal to 100,000 EUR), you purchase $150,000 (100,000*1.5). If you use leverage of 1:100, you only pay $1,500 (150,000/100= $1,500) to open your position. To do this theoretical exercise with a current example, see this page for live forex rates).
- Mini Lot: Beginner traders are often advised to trade with mini, micro or nano lots in order to avoid the risk of huge losses. A mini lot is equal to 10,000 units, which is 10% of a standard lot. Hence, when a trader opens an order of 0.1 lots, he is trading 1 mini lot.
- Micro Lot: A micro lot is equal to 1000 units, which account for 1% of a standard lot. When a trader opens an order of 0.01 lots, he is trading 1 micro lot. For instance, buying 0.01 lots of GBP/USD means you buy 1,000 GBP.
- Nano Lot: A nano lot, in Forex, is referred to 10 or 100 units. Why is there a difference of units? Because some forex brokers set nano lot to 10 units while some others set it to 100 units. However, nano lot is not common; only a few brokers offer it. Normally, the nano lot is the preferred choice of newcomers or strategy testers. Therefore, if you purchase a new expert advisor or want to test a new strategy, nano lot is suitable for you, at least for the first weeks.
Lot Sizes for Commodities
1 lot of Gold is equivalent to a hundred ounces and 1 lot of Silver is equivalent to 5000 ounces. 1 lot of Crude Oil is referred to 100 barrels. Meanwhile, 1 lot of Natural Gas is quantified by 100,000 cubic meters. Those statistics are not written in stone but can change depending on the broker. Therefore, you should obtain information about commodities from the broker you trade with, to get the best understanding.
In short, it is important to know your trade volume because it affects your trading strategies and your profits. A bigger lot may bring you greater risks, which means that you can see big profits or big losses, and smaller lot such as nano lot or mini lot are often suitable for beginner traders who are more comfortable trading with smaller sizes and lower risk.