A lot on Forex or on the exchange is a unit of measurement of the volume of a position, which represents a fixed amount of the base currency on the Forex market. Its trading volume is indicated only in lots, the size of which directly affects the level of risk. The larger the volume of a lot on Forex, the higher the risk. The risk assessment system (risk management) includes a model that allows, depending on the expected level of risk, volatility (stop loss level) and leverage, to calculate the optimal volume of a standard lot on the foreign exchange markets. To learn what this model is, how to use it and how the trader’s calculator can help you, read this article.
What is a lot in trading?
A lot is a standard unit of the volume of a currency position opened by a trader. In other words, the amount of money that a trader invests in buying a particular currency with a view to selling it later at a more advantageous price. Lot calculation is one of the components of the risk management system, recommended for those who approach trading in a balanced and structured manner.
What is a lot in Forex?
Forex trading allows opening transactions only in certain volumes of trading units, called lots. The trader does not have the opportunity to buy, for example, exactly 1,000 euros, but he can buy 1 lot, 2 lots or 0.01 lot, etc. A lot is a term used to determine the contract size of an asset. This is the size of the transaction, the volume of an asset (currency, barrels of oil, etc.) that can be bought or sold by a trader.
Example. The price of a barrel of oil is 40 USD. When placing an order to buy or sell, the trader does not indicate the number of barrels, but the number of lots. A lot is a contract consisting of fixed quantities of barrels, indicated in the contract specifications. The contract size for each broker may be different: one broker has 10 barrels, another – 100 barrels. In both cases, the transaction is made with a volume of 1 lot, but in the first case its object is 10 barrels, in the second – 100
Let’s see what 1 lot is equal to in Forex:
A standard lot on Forex is 100,000 units of the base currency. For example, if the EUR/USD quote is 1.1845, then a position with a volume of 1 lot will be 118,450 units of the quote currency, that is, exactly the amount in US dollars to buy 100,000 euros.
The base currency is the currency that is bought or sold for another currency. In quotes, the base currency is always first, the quoted currency is second. The quoted currency reflects the price of the currency pair. For example:
0.01 lot of GBP/USD with a quote of 1.29412 means that for 1,000 GBP you have to pay 1,294.12 USD.
0.01 lot of EUR/AUD with a quote of 1.65981 means that for 1,000 EUR you have to pay 1,659.81 AUD.
The value of a standard lot of 100,000 units of the base currency is valid for currencies. For other assets, the size of a lot is different. For example, for stocks, it is the quantity that largely depends on the type of stock. Oil has barrels, gold has troy ounces. You can see the lot value, the number of conventional units of an asset in a contract, in the specification .
Most traders have minimum and maximum lot requirements for different types of accounts. The upper limit is most often limited to 100 lots, the lower limit – to 0.01 lots. In the example above, the minimum investment would be $ 1.184. If you use leverage of 1:100, then a minimum deposit of $ 11.84 will be enough to start, provided that 100% of the money (which is unacceptable in terms of money management) is invested in the transaction. The second option is to use cent accounts (if such a possibility is provided by the broker). The only difference between cent accounts is that the calculations are made here in cents, not dollars. In this case, $ 11.84 is enough to buy a minimum micro lot without using leverage .