28 Sep, 2023

What is a Lot in Forex?

In Forex, a lot refers to the standardized quantity of a currency pair being traded. There are different lot sizes, with the most common being the standard lot (100,000 units), mini lot (10,000 units), and micro lot (1,000 units). Lot size determines the trade's volume and potential profit or loss.


In the world of Forex trading, transactions are often measured in units known as "lots." Essentially, a lot represents the quantity of currency units you intend to buy or sell.

A "lot" serves as a standardized unit for measuring transaction amounts.

When you place orders on your trading platform, these orders are typically specified in lot sizes. To illustrate this concept, consider the analogy of an egg carton. When you buy eggs, you typically purchase a carton, which contains 12 eggs.

The standard lot size in Forex is 100,000 units of currency. However, there are also variations such as mini, micro, and nano lots, which are equivalent to 10,000, 1,000, and 100 units, respectively.

Standard 100,000
Mini 10,000
Micro 1,000
Nano 100

Different brokers may present quantity information in terms of "lots," while others may display the actual currency units.

As you may already be aware, changes in the value of one currency relative to another are measured in "pips." A pip represents a very small percentage change in the value of a currency unit. To capitalize on these minute fluctuations, traders often need to trade substantial amounts of a particular currency to realize significant profits or losses.

Let's assume we are using a standard lot size of 100,000 units. We will recalculate some examples to demonstrate how this affects the pip value.

  • USD/JPY with an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip

  • USD/CHF with an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not the first currency quoted, the formula is slightly adjusted.

  • EUR/USD with an exchange rate of 1.1930: (.0001 / 1.1930) x 100,000 = 8.38 x 1.1930 = $9.99734 (rounded up to $10) per pip

  • GBP/USD with an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 (rounded up to $10) per pip

The pip values for EUR/USD and USD/JPY can vary depending on the chosen lot size.

Unit Standard lot Mini lot Micro lot Nano lot
EUR/USD Any $0.0001 $10 $1 $0.1 $0.01
USD/JPY 1 USD = 80 JPY $0.000125 $12.5 $1.25 $0.125 $0.0125

It's worth noting that your broker may use a different method to calculate pip values relative to lot size. Regardless of their approach, your broker should provide you with information on the pip value for the currency you are trading at any given time.

In essence, brokers handle the mathematical calculations, making it more convenient for traders. Keep in mind that the pip value can change as the market fluctuates, depending on the currency pairs you are actively trading.

What the heck is leverage?

You might be curious about how small investors can engage in trading with such substantial amounts of money. Imagine your broker as a financial institution that effectively extends you a loan of $100,000 to trade currencies.

All the broker requires from you is a good faith deposit of $1,000, which they hold on your behalf but don't necessarily keep. It may sound too good to be true, but this is the essence of forex trading using leverage.

The extent of leverage you employ depends on your broker and your personal comfort level. Typically, brokers mandate a deposit, often referred to as "margin."

Once you've deposited your funds, you gain the ability to initiate trades. The broker will also specify the amount of margin required for each position (lot) you trade.

For instance, let's say the allowable leverage is 100:1 (equivalent to a 1% deposit requirement), and you wish to trade a position valued at $100,000 while having only $5,000 in your account. No worries, as your broker will set aside $1,000 as a deposit and essentially lend you the remainder.

Importantly, any losses or gains incurred will be deducted from or added to the remaining cash balance in your account.

The minimum security margin for each lot varies from broker to broker. In the aforementioned example, the broker stipulated a 1% margin requirement. This implies that for every $100,000 traded, the broker demands a $1,000 deposit against the position.

It's vital to clarify that the $1,000 is not a fee; it's a deposit, and you will receive it back when you close your trade. The reason for this deposit requirement is that while the trade remains open, there is a risk of potential losses.

Assuming your USD/JPY trade is your sole open position, you would need to maintain an account equity (the absolute value of your trading account) of at least $1,000 at all times to keep the trade active.

If the value of USD/JPY plunges and your trading losses lead to your account equity falling below $1,000, the broker's system will automatically close your trade to prevent further losses. This serves as a protective mechanism to prevent your account balance from going into the negative.

Understanding the mechanics of margin trading is crucial, and we dedicate a dedicated section to it later in the School. It's a must-read if you aim to protect your account from substantial losses.

For now, let's move on to other aspects of forex trading.

How to Calculate Profit and Loss in Forex?

Now that you understand pip value and leverage, let's delve into the calculation of your profit or loss in a trade.

Suppose you want to buy U.S. dollars and sell Swiss francs. Here's how you would calculate your profit or loss:

  1. The quoted exchange rate is 1.4525 / 1.4530. Since you are buying U.S. dollars, you will work with the "ASK" price, which is 1.4530 – the rate at which traders are willing to sell.

  2. You decide to buy 1 standard lot (100,000 units) at 1.4530.

  3. A few hours later, the price moves to 1.4550, and you opt to close your trade.

  4. The updated quote for USD/CHF is 1.4550 / 1.4555. Since you initiated the trade by buying, to close it, you must now sell, which means using the "BID" price of 1.4550 – the price at which traders are willing to buy.

  5. The spread refers to the difference between these two prices, which in this case is 1.4530 (ASK) to 1.4550 (BID), equating to 20 pips.

  6. Using our earlier formula: (.0001 / 1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

Bid/Ask Spread Reminder

Keep in mind that when you initiate or conclude a trade, you encounter the spread reflected in the bid/ask quote.

When purchasing a currency, you will utilize the offer or ASK price.
When selling, you will work with the BID price.

In our next section, we'll provide you with a concise summary of the latest forex terminology you've acquired!

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