When you choose a broker to trade currencies, you will notice that trading is executed in specific amounts of assets you buy and sell within a specific timeframe. That amount is defined by a lot. A lot expresses the number of asset units your trade per session.
What’s more, a lot represents the smallest size of a position available in trading. So, to make the most of your strategies, you need to know exactly what lot size your online broker offers. Knowing the size of the lot will help you define how much money you need to invest along with the pip value for positions of different sizes.
In this article, we will have a closer look at what a trading lot is, how it works, and why it is very important to be aware of the lot size delivered by the broker.
Generally, you will come across 4 major types of trading lots. They are different in size and have a different number of units (currency pairs) you need to trade per session. It means each lot requires a different amount of investment. Have a look at all of them and memorize them:
|Number of Units
Now, let’s have a closer look at each lot type to understand how to use them in trading and how they are different.
As you can see in the table above, a standard lot considers you trade 100,000 asset units (base currency in the pair) per session. Additionally, a standard lot usually comes with a $10 pip movement for every trade you open.
When you buy a standard lot, it means you purchase 100,000 units of the base currency from the underlying pair. For example, you target the EUR/USD pair and want to buy euro versus USD on the currency exchange market. The rate is 1.10. So, the worth of your purchase will be $110,000.
A standard lot is a perfect option for experienced traders with a well-established strategy.
A mini lot in trading will work best for beginner traders who do not want to risk big amount of cash right at once. This type lets you trade with smaller amounts of funds, which also means lower trading risks as a part of your money management approach.
At the same time, mini lots can be quite tricky. Although they are called “mini”, the number of investments can still be pretty huge. On the other hand, it means you can make a significant profit as well.
Usually, mini lots are 10% of a standard lot. When you buy a mini lot, you purchase 10,000 units of the base currency. When you trade a USD-based asset, the pip price change is worth $1 per trade.
As stated earlier, 1 mini lot is equal to 10,000 units of the base currency. For example, you trade the EUR/USD pair. The exchange rate is 1.10. It means the worth of your purchase will be $11,000.
Micro lots represent one of the smallest sizes a trade can be. It appears to be a safe and effective way for beginners to get started in the market. The initial investments are quite low, which makes it possible for newbies to apply their strategies with a lower risk of failure.
A micro lot represents 1% of a standard lot and is equal to 1,000 units of the base asset in the currency pair. If you find your account with the USD, it means your lot is worth $1,000 while the pip value will only be $0.10.
When you buy 1 micro lot of the currency pair, it means you purchase 1,000 units of the base currency. Returning to our previous examples when you trade the EUR/USD pair and the rate is 1.10, the worth of your purchase will be $1,100.
The name of the Nano lot speaks for itself. It is the smallest lot size available in trading. In simpler words, it offers risk-free trading like with a demo account. The only difference here is that you trade with real money.
The risk of trading with Nano accounts is very low. This fact makes such lots a good option for beginners who only make their first steps on the way to establishing a winning methodology.
1 Nano lot is equal to 100 units of the underlying asset. When you purchase 1 Nano lot, it means you buy 100 units of the base currency. If the EUR/USD rate is 1.10 the worth of your purchase is $110.
The lot size you choose depends on your skills, trading experience and understanding of how the market moves. What’s more, it is very important to consider risk and money management strategies to minimize the possibility of losing big. So, before choosing a lot size provided by a broker, you need to clarify the number of investments you CAN afford.
Experts recommend depositing the initial lot worth. In simpler words, if you choose a standard lot, you need to have at least $100,000 on the balance, $10,000 for a micro account, and so on. Traders must always keep in mind that even small market and currency price moves can take you to the point of no return.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.