The forex market is one of the biggest and most impressive financial entities in the world, and one that continues to grow against the backdrop of technological innovation.
However, this is also an incredibly volatile and highly leveraged market, while novice traders are bound to come across confusing terms and related jargon that has a direct impact on their experience.
In this post, we’ll look at the concept of ‘standard lots’ in forex trading, while asking what role they play in the marketplace.
Standard lot explained
Essentially, lot size is a common metric in the world’s financial markets, and refers to the measure of a quantity or increment of a particular asset or instrument.
In foreign exchange, a standard lot is the equivalent of 100,000 units of the base currency in a forex trade. Interestingly, it’s one of three commonly known lot sizes, with mini and micro-lots also available through the MT4 trading platform and similar entities.
While a standard lot is equivalent to 100,000 units of a base currency, micro lots equate to just 1,000 units. Conversely, mini-lots are equivalent to 10,000 units, while some traders may also deal in ‘nano lots’ which relate to just 100 units of a base currency.
But why are these distinctions important? Well, your trading lot size will impact directly on how much a market move or price shift affects your positions. For example, a 100-pip move on a small trade will not be nearly as impactful as a 100-pip shift on a larger position, so there’s a clear risk-reward ratio to consider when choosing lots and executing orders.
How to Choose Your Lot
Because of this, most currency traders choose to trade mini or micro lots, as they look to keep their lot size relative to their capital holdings and minimise real-time risk.
But how do you go about choosing your own lot size? Firstly, you’ll need to consider the level of risk that you want to encounter, with standard lots increasing your trade size and leverage requirements while optimising the impact of individual pip movements.
For example, if you’re trading EUR/USD, a one-pip movement will translate into a monetary impact of $10 when trading with a standard lot. Conversely, the impact on a nano lot will be just $0.01, so you’ll need to consider this in line with your deposit amount and leverage.
Remember, the pip value is defined by the currency pair being traded, along with its real-time exchange rate and the overall size of the position. To calculate a pip and the potential impact of price movements on certain lots ahead of time, simply divide a single pip (usually 0.0001) by the existing market value of your chosen currency pair.
This will help you to calculate potential profits and modify your approach to risk management, while also estimating how much leverage you’ll need to open a desired position.
Leverage refers to the amount borrowed to open a position, and is usually expressed as a ration (such as 50:1). The available leverage offered by a broker can impact on your choice of lot, so it’s important to factor this in when making a decision.