Forex Lots Explained
In Forex trading, currencies are traded in units called “lots”. Think of them like cartons of eggs, where one carton has 12 eggs. In Forex, a standard lot represents 100,000 units of currency. However, there are smaller lot sizes too: mini (10,000 units), micro (1,000 units), and nano (100 units).
Lot Type | Number of Units |
---|---|
Standard | 100,000 |
Mini | 10,000 |
Micro | 1,000 |
Nano | 100 |
The value change in currencies is measured in “pips”. For significant profit or loss, large amounts of currency must be traded.
For instance, with a standard lot size (100,000 units):
- For USD/JPY at 119.80: $8.34 per pip
- For EUR/USD at 1.1930: Around $10 per pip
Leverage in Forex
Leverage in Forex allows you to trade large sums with a smaller deposit. Picture your broker as a bank letting you trade $100,000 in currency, while only asking for a $1,000 deposit as assurance.
Using leverage, your broker sets aside a part of your account balance (known as “margin”) to allow you to trade. If you have $5,000, but want to trade a $100,000 position using 100:1 leverage, the broker holds $1,000 of your money. This $1,000 isn’t a fee but a temporary deposit. It’s returned when trades are closed.
Why does the broker hold this? If you’re trading USD/JPY with 100:1 leverage, you’d need at least $1,000 in your account. Should the trade turn against you and your balance drops below this, the broker might automatically close your trade, safeguarding from larger losses.
Calculating Profit and Loss in Forex
Imagine you buy 1 standard lot (100,000 units) of USD/CHF at an ASK price of 1.4530. Later, the rate shifts to 1.4550, and you decide to close the trade using the BID price of 1.4550. The difference, 20 pips, when calculated using the formula (.0001/1.4550) x 100,000, results in a profit of $137.40.
Remember, trades are subject to the bid/ask spread. Buying uses the ASK price, and selling uses the BID price.