What Is Lot? Lot is a term in the Forex market, serving as a unit of measurement for currency volume. This is basic knowledge, which is important for traders when participating in trading. Because Lot helps them control trading orders better. So the calculation formula for What Is Lot? How are lots related to PIPs and leverage? Let’s Learn Forex Trading in the article below.
Learn the term What Is Lot in Forex?
In Forex, a Lot is understood as a standard unit used to measure the volume of a currency position that a trader is opening. It represents the trading volume in the Forex market, also known as Lot. This is an investment by traders by buying a currency and selling it at a more profitable price later. Currently, popular lot types in Forex include:
- Standard Lot: Represents 100,000 currency units
- Mini Lot: Represents 10,000 units of currency
- Micro Lot: Represents 1,000 units of currency
Choosing the right Lot size is important when trading Forex. Because Lot size will affect the value of each pip. At the same time, it also affects leverage levels and risk management in trading.
See more: Successful what is forex exchange trading?
What is the value of 1 Forex Lot?
So 1 What Is Lot and what is its value? We will continue to learn about 1 Lot in the information below.
1 Forex Lot means representing a trading volume of 1. Besides, Forex Lot units will be converted to smaller currencies and units such as Mini, Nano, and Micro. To be able to convert 1 Lot Forex unit to other units, traders can apply the following conversion table:
- 1 Standard Lot = 100,000 units
- 1 Mini Lot = 1/10 Lot = 10,000 units
- 1 Micro Lot = 1/10 Mini Lot = 1,000 units
In addition, the value of 1 Forex Lot also depends on the currency pair that the trader is trading and the current exchange rate of that currency pair on the foreign exchange market.
Forex Lot calculation formula quickly and accurately
Calculating Lot value in Forex will help traders optimize position volume relative to margin. At the same time, it allows you to balance transactions and calculate the desired level of risk or investment return. If the right lot and position increase process is chosen, investors can choose to trade in a general position to protect against drawdowns, corrections, volatility, or payback.
So the formula applied to calculate What Is Lot? In all cases with any asset order you open. It is all done in the currency of that account type (most will be USD). So, to calculate the Lot value, traders need to know how much they will reserve in USD when opening a position, for example, the cross rate. A cross rate is a currency pair that does not contain the US Dollar (eg CHF/JPY…). In particular, the formula to calculate the amount to buy 1 Lot of Forex is:
| Amount to buy 1 Forex Lot = Value of lot you want to buy x Leverage ratio |
Or to optimize calculation time and effort, as well as provide the most accurate results. Traders can use the Forex Lot calculator tool to find out the size of the Lot in Forex.
An illustrative example of Forex Lot calculation
To help readers visualize What Is Lot and more easily how to calculate a Lot. Below is an illustrative example of how to calculate a standard Lot. For example, a Trader wants to buy 1 standard Forex Lot of USD/CAD with an expected leverage of 1:100. To calculate the amount of money an investor needs to spend according to the formula, we have 100,000 x (1/100) = 1,000 USD. Thereby, traders can see that Lots and currency rates are not related to each other. They operate completely independently and the same goes for other assets.
What are Forex Lot relationships?
In Forex trading, Lot size has another important relationship with a few factors. So have traders ever wondered what those relationships with Lot Forex are? That is the connection between Pip – Lot and Lot – leverage.
What is Pip and Lot’s relationship?
First, we will learn the relationship between Pip and What Is Lot? In Forex, Lot is the unit of trading volume of a currency pair or commodity. The pip is the unit for calculating the price change of that currency pair (commodity).
It can be understood that if you buy 1 Lot of the EUR/USD pair for 1.2536 (1 EUR = 1.2536 USD). Just the next day, the rate will increase to 1.2546. That means the price of the currency pair has increased by 10 pips. Calculated based on the trading volume of 1 Forex Lot, that means for every 100,000 EUR, the trader will profit an additional $10/1 pip. So the corresponding profit they receive is $100.
To better understand Pip and What is Lot, readers can learn more about what is Spread and what is Equity. Because there is a connection between them, forming relationships in Forex.
What is the relationship between leverage and Forex Lots?
According to the Forex Lot calculation formula above, you must have seen the connection between Lot and leverage. If the leverage is high, the Lot unit will also increase and vice versa. However, traders also need to be careful because high leverage entails great risk. Therefore, you should not overuse the leverage that Forex exchanges provide.
For example: the Trader uses 1,226 USD to buy 1,000 GBP (ie 0.01 Lot). If the USD/GBP exchange rate increases to 1.2380, you will profit $10. For this number, this is too little profit, so Forex exchanges will provide traders with additional leverage of x100 or even x2000 times. In case, a trader uses x100 leverage with a deposit capital of 1,226 USD, the amount allowed can be up to 122,600 USD to buy 100,000 GBP. Meaning, the trader bought 1 Lot of Forex USD/GBP at 1.2260.
See more: Opening and verifying an ICMarkets account
Some important notes for traders when using What Is Lot?
In particular, new players will not be able to imagine the profit or loss when placing an order for a currency pair. Therefore, when placing the first buy/sell order, traders should check the order effect. By placing an order with the smallest volume, equivalent to 0.01 Lot. Based on that, even if the price trend goes against the prediction, it will not cause traders to lose much. After gradually getting used to Lots, traders can gradually increase to 0.1 Lots, 0.8 Lots, or even 5 Lots…
summary
In the above article, Learn Forex Trading has provided readers with related information about what is lot the same time, it provides some other useful data about the Lot unit. Hopefully, it will help traders understand this term and apply it in practice to improve their trading efficiency.
FAQs:
What Is Lot? What is the maximum lot size?
Lot is a standard unit used to measure the trading volume of a currency pair. The maximum size of 1 Forex Lot is usually 100,000 units of the base currency.
What factors determine the size of the Lot?
Two main factors affect the size of the Lot: the trading account and the level of risk the trader can accept.
What is the best size to use?
In reality, there is no best or worst Lot size. Because Lot size depends on many factors: deposit amount, allowed risk level, conditions, trading tools…
