What is a lot

Howdy again,

So we had previously learnt about the forex term of the pip and pipette which we used to learn how to calculate how the various pip movement means to the amount of profit or loss you make from the fluctuation of the forex market.  This understanding of the pip will be essential in you knowing what lots are, If you haven’t learnt what are pip is then you wont understand this lesson. A pip is the most important term to a forex trader so refer back to WHAT IS A PIP..in the previous post so as not to float through this lesson.

What is a lot?

Before the spot forex was only traded in specific amounts called lots. The standard size for a lot is 100,000 units. There are also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively i.e.;
  1. Standard-100,000
  2. Mini       -10,000
  3. Micro     -1,000
  4. Nano      -100
As previously discussed, the changes in currency value relative to another is quoted in “pips,” which is a very, very tiny percentage of a unit of currency’s value. To take advantage of this tiny changes in value, you need to trade large amounts of a particular currency in order to see any meaningful profit or loss.
So now we will be using the 100,000 unit (standard) lot size. We will now calculate  some examples to see how it affects the various pip value.
  1. USD/JPY at an exchange rate of 119.80(.01 / 119.80) x 100,000 = $8.34 per pip
  2. .USD/CHF at an exchange rate of 1.4555(.0001 / 1.4555) x 100,000 = $6.87 per pip
In other instances  where the U.S. dollar is not quoted first, the formula is different.
  1. 1.EUR/USD at an exchange rate of 1.1930(.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
  2. GBP/USD at an exchange rate or 1.8040(.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Brokers have a different formulas for calculating pip value relative to lot size but however they do it, they’ll be able to always tell the pip value for the currency you are trading at that particular time. As such when the market moves, so will the pip value depending on the currency.
What is leverage?
I know the next question your going to ask is how a small trader like yourself can trade larger amounts of money. Well you need to think of your broker as a bank that lends you $100,000 to buy currencies. All the broker asks from you is that you give it $1,000 as a real deposit, which he will hold for you but not always keep. Sounds too amazing doesn’t it too good? Well this is how leverage works.
So we move to FOREX TERMS….

 

 

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