What Is a Lot?
A ‘lot’ is the measuring unit of foreign exchange transactions. It is similar to a kilogram of rice or a liter of orange juice. Every order you place in a Forex trade is placed in lots. These lots are equal to a specific quantity of the base currency that you are dealing in, i.e., USD, GBP, JPY, INR, etc.
For example, suppose you want to buy one lot of USD. How much USD are you getting? Some brokers will show you the actual quantity of currency that you’re buying. Others will trade exclusively in lots. So, let’s try to get a deeper understanding of lots.
There are three kinds of lots to choose from: standard lots, micro lots, and mini lots. All of these are equivalent to a different amount of the base currency of your choice. A standard lot means 100,000 units, while a mini lot stands for 10,000, and a macro lot equals 1,000 units.
In recent times, new amounts have become popular that are not standard, mini, or micro. The nano lot is the prime example, which is equivalent to only 100 units in the base currency. This has made it easier for investors to get into the market and raise overall competition in Forex trading.
How to Choose the Right Lot Size
Forex trading is one place where size definitely does matter. The size of the lot you choose to deal in is directly proportional to the amount of risk you are willing to take. Conversely, the higher the risk, the higher the reward.
So, how do you choose the lot for you? Let’s find out.
Trading in Micro Lots
As a beginner, conventional wisdom states that you ought to begin with the lowest possible amount of risk. In this instance, we agree. You need to learn the ins and outs of the market before moving up to the big leagues. Since micro lots are the smallest size available to most brokers, you should start there.
The losses aren’t very significant. For every fluctuation against you, if your base currency is USD, you lose 0.1 USD. This is what makes micro lots so enticing for beginners.
Graduating to Mini Lots
Dealing in mini lots is a big step up from micro lots. As stated before, a mini lot is 10,000 units in your currency. This is a bigger risk because every time the market fluctuates, you stand to gain or lose 1 unit of currency.
For example, if your base currency is USD, every time the market moves against you, you lose a dollar. Throughout the day, or even in a single hour, the market can fluctuate as many as 100 times. As a beginner, if you want to start trading in mini lots, make sure you’re well funded.
We recommend a starting balance of 2,000 units in your bank to be comfortable with the estimated losses you might accrue.
Using Standard Lots
Standard lots deal in 100,000 units, which means that every fluctuation against you costs ten dollars. If you start with a balance of 2,000 units of currency in your account, which is usually the minimum balance required, twenty fluctuations can eat up 10% of your balance. Given the volatility of the market, this can happen in a flash.
This is the main reason why most traders with small balances don’t trade in standard lots. Using mini and micro lots won’t net you amazon profits, but they won’t bankrupt you in the blink of an eye, either.
Of course, at the end of the day, you are the one who decides your risk tolerance. Keep in mind, though, that if you want stable, long term gains, you should keep your lot size within reason and proportional to your bank balance.
Investing in the foreign exchange market promises to be an exciting time for everyone. With proper research, shrewd risk management, and a bit of luck on your side, you stand to make a lot of profit. However, you need to understand that you are investing more than your money. You need to invest time and effort as well.
Wherever investment is made, there is a risk factor that must be taken into account. The main concern for many is cybersecurity. This is because most of the transactions occur online, and hackers can gain access to accounts of brokers and make unauthorized transactions. This comes with the territory. Big money has always attracted sharks.
And since you’ll be entering the ocean amidst a feeding frenzy, you need to do your utmost to protect yourself. Always, always do your research.
Hopefully, this article gave you the insight you needed to get started. True, we covered only a fraction of the knowledge you’ll need, and you should use this as a launching pad to learn more. Above all else, be careful and happy investing!