What is the meaning of Lots and Lot Size?

The size of the contract in case of forex trading also frequently is referred to as lots and lot size. As it isn’t interesting to trade with one unit at a time, there are different kinds of contract sizes available, dependent on the extent of availability of the forex trader’s capital.

It speaks for itself that it’s not interesting to trade with one unit at a time. If, for example, you buy one unit EUR/USD with a quoted price amounting to 1,2310, and the price then rises to 1,2355, you have earned an all-in-all amount of $0,0045. Except for the fact that this result isn’t interesting at all for the forex trader himself, forex brokers are hardly willing to accept these kinds of trade, because they themselves also cannot earn a single dime out of this.

The terms which are applied to the forex contracts

  • The contracts intended for buying/selling currencies are called lots.
  • The extent of these contracts is called lot size, or in other words the number of lots.

The three most occurring lots which are being traded

Standard lot
A standard lot is equal to 100,000 units of the base currency.

Mini lot
A mini lot is equal to 10,000 units of the base currency and consequently this contract is ten times smaller in comparison with a standard lot.

Micro Lot
A micro lot is equal to 1,000 units of the base currency and consequently this contract is a hundred times smaller in comparison with a standard lot.

Examples

Imagine a forex trader is expecting that the EUR is going to rise compared with the USD and for that reason he decides to go long EUR/USD at a price of $1,2350.

Standard Lot:
So in this case the forex trader buys 100,000 units of the base currency. To obtain 100,000 EUR he consequently has to pay 100,000 x 1,2350 (the price per EUR) = $123,500.

Mini Lot:
So in case of a mini lot the forex trader buys 10,000 units of the base currency. To obtain 10,000 EUR he consequently has to pay 10,000 x 1,2350 (the price per EUR) = $12,350.

Micro Lot:
So in case of a micro lot the forex trader buys 1,000 units of the base currency. To obtain 1.000 EUR he consequently has to pay 1,000 x 1,2350 (the price per EUR) = $1,235 USD.

Several numbers of lots:
Most forex brokers allow you to determine the number of lots yourself. This way for example you can also choose to trade 3 mini lots at the same time.

An example showing the trade of several mini lots at the same time:
Imagine the price of EUR/USD is 1,2350. So in case of three mini lots the forex trader buys 30,000 (3×10,000) units of the base currency. To obtain 30,000 EUR he consequently has to pay 30,000 x 1,2350 (the price per EUR) = $37,050.

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Comments

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