A lot in forex trading is a unit of measurement designed to help standardize trade sizes.
In simple terms, a lot determines the number of currency units you will buy or sell within a single trade. Unlike stocks, where price changes can be significant, the change in the exchange rate of a currency pair is in most cases minimal. This means that trading one unit of a currency (i.e. 1 euro or dollar) would not get you anywhere, so this is where lots come in handy.
Essence
- A lot is a unit of measurement used to determine the size of a trade
- Forex traders set a lot size for each of their trades
- There are three widely used lot sizes in forex trading
- Your trading experience, capital size and market volatility are key factors to consider when choosing the appropriate lot size
Lot sizes explained
There are three widely used lot sizes in forex and each represents a different amount of currency units.
- Standard: The standard lot (1 lot) is 100,000 units of currency. If you trade 1 lot of a currency pair, your will be trading 100,000 units of the base currency (in the case of EUR/USD, 100,000 euros).
- Mini: The mini lot (0.1 lot) is one-tenth of the standard lot, so it equals 10,000 units of currency (in the case of EUR/USD, 10,000 euros).
- Micro: The micro lot (0.01 lot) is the smallest lot size brokers will allow you to trade. It is 1,000 units of currency (in the case of EUR/USD, 1,000 euros).
Traders can set the size of their positions by trading multiple amounts of given lots, for example, 0.3 (3 mini lots), 0.07 (7 micro lots).
Calculating lot sizes
Calculating the exact amount of currency a certain lot size involves is not a difficult exercise.
Let's use an imaginary trade as an example. If you trade one standard lot of EUR/USD at an exchange rate of 1.2000 (meaning that for 1 EUR you get 1.2 USD), a standard lot means it costs 120,000 units of the quote currency (USD) to buy 100,000 units of the base currency (EUR). As you can see, we simply multiply the exchange rate by the lot size (in this case 100,000).
The same applies to mini and micro lots. Staying with the above example, if you trade a mini lot of EUR/USD at an exchange rate of 1.2000, you will need 12,000 units of the quote currency (USD) to buy 10,000 units of the base currency (EUR).
Do not worry if these calculations seem confusing. When you trade, you will not need to do the math yourself, your broker will do it for you, you simply need to enter your desired lot size. In addition, there are multiple lot calculators online that you can use.
How to choose a lot size in forex?
Choosing a lot size is an important building block of risk management and strategy. Ideally, you choose an appropriate lot size for each trade (with the help of calculators) according to your stop-loss distance in pips, which should be at least partly based on market volatility.
We recommend that you optimize your lot size for each trade according to market volatility in order to keep a fix risk percentage. In a high-volatility market, use smaller lot sizes and in a low-volatility market use higher lot sizes for your trades. We advise using micro lots at first if you are a beginner forex trader or you are trading with a smaller capital.
If you want to start forex trading, make sure to check out our list of the best forex brokers compiled by our team of analysts after testing each broker by opening an account and trading with real money. If you are a beginner, we recommend opening a demo account at a forex broker to get yourself familiarized with forex trading without the risk of losing money. Using a demo account is free of charge.
FAQ
What is a nano lot?
A nano lot (0.001 lot) is one-tenth of a micro lot. A nano lot represents a very small amount of currency units and as such it is not widely used because most brokers do not allow trading in nano lots.
Which lot size is better for beginners?
Forex trading is a complex form of investment and comes with a high degree of risks. Beginners should start trading micro lots until they become more familiar with forex strategies and movements in the forex market. Using micro lots will help minimize risks.
How big is a lot in forex?
A lot (standard lot) is 100,000 units of base currency. This is the default measurement of trade sizes in forex.
Further reading
- Forex trading explained
- Bid-ask spread - Learn what it is and why it is important
- Lowest Spread Forex Brokers in 2024 | BrokerChooser
- What is FX? What is forex?
- How to start forex trading
- Forex trading examples
- What is forex trading about?
- Forex trading hours
- Forex trading glossary
- Forex trading in India
- Forex pips explained: learn the meaning of pips and pip calculation in no time
- Forex trading for beginners: learn the basics
- Leverage explained: learn what it means and how it's used
- What is volatility in forex?
- Forex margin: learn how margin works and how to calculate it
- What is a currency option?
- What is a currency future?