What is a lot in Forex?
A lot is one of the basic concepts for those who want to trade in Forex. To properly evaluate the financial results of trade, it is necessary not only to have an idea about lot, but to understand how it is calculated. So, let's consider its concept, its value, and how it is calculated.
Lot is the basic unit of measure in Forex
A lot is a standard unit of measure in the Forex trading equal to 100 thousand units of the base currency. Base is the first currency in a pair. For example, a standard lot is equal to 100 thousand euros in pair EUR/USD. Not a small amount, right? Very large players or financial institutions (commercial banks, large companies, investment and insurance funds, etc.) can handle it. Until recently, no one but them could participate in the Forex trading.
With advent of the dealing centers, an opportunity to trade fractional lots appeared. Terms like mini (10 thousand base units) and micro (1 thousand base units) lots became known. Because of this, the Forex market has become accessible to smaller players.
Firms get funds of their clients, combine them with standard lots, and direct to the market for bidding. Thus, you can trade in Forex even without $100,000.
Price of lot
Because in Forex you can trade not only the basic, but the fractional lots, the price for each item will depend on the trading volume. When trading a standard lot 1 PIP value will be 10 units of base currency. Trading mini lot, the trader receives 1 unit of the base currency for each item. Trading micro lots will bring 0.1 unit of the base currency for the item.
Consider the following example. You are trading a standard lot in $ and got a profit of 20 points. Since the price per item is 10 dollars in this case, your profit will be: 20 points *$10 = $200.
Nowadays, there is also a possibility to trade on cent accounts. In this case, base lot is equal to 1 unit of the base currency. Accordingly, a mini lot is 0.1 and a micro is 0.01. The volume of transactions is minimal, but this is a very good opportunity to practice and test your trading strategy for beginners. For cent accounts, the item cost is as follows:
- Standard lot – 0,1 for point;
- Mini lot - 0,01 for point;
- Micro lot – 0,001 for point.
However, the calculation of the financial results in trading is not so limited. To determine profit or loss from operations in monetary terms, you need to figure out the lot size for each specific transaction.
How to calculate a lot?
To calculate a lot for a particular transaction, it is necessary to define the basic parameters of the transaction:
- Level of allowable risks;
- Number of points between the current price and StopLoss order.
Nowadays, there are special calculators allowing to calculate the lot size automatically. However, some traders prefer to carry out calculations manually. Consider the example of how it's done.
For example, the deposit is $1000, the level of risk is no more than 2%, and the number of points between current price and stop loss is 30. Thus, we can lose no more than $ 20 ($1000*0,02) from one trade at the current level of risk in case of loss. This means that 30 points up to stop-loss cost $20. Therefore, 1 point equals $0,67 (20/30). $1000 is a 0.01 lot, and that means 1 point is equal to $0,1. Consequently, we multiply 0.67 by 0.1 and get the size of lot for this transaction equal to 0,067 USD.
To calculate the financial result of the trade, you need to multiply the cost of working lot by the amount of points reached by price in the profitable or unprofitable direction for a trader.
Perhaps, first calculation may seem complicated, but it is quite simple afterwards. Besides, there are special lot calculators. They are freely provided by the majority of brokerage companies.