And there is no getting away from it, lot size is a term which you will continue to see as you continue to trade.
So what exactly is a Lot?
And why is it important to understand the lot trading concept before you start trading?
Let’s use a simple analogy to explain this concept.
When you buy diapers from the supermarket you don’t have any choice to split the pack. You have to buy it as it is.
When you buy tea bags from the supermarket, you don’t get the choice to request for half of what is in the box. You must take the whole pack as it is.
That’s how lot sizes work in Forex. Except the packs of diapers are now a bundles of currencies you will be buying/selling.
Unlike diapers which only have 32 pieces in a single pack, a standard lot has 100,000 currency units.
However, most Forex brokers now have diverse lot sizes of smaller units.
Other brokers use different terms to refer to different lot sizes
- Standard lot
- Mini lot
- Micro lot
- Nano lot.
Now that you know what a lot is, try to trade as many of them as you want to increase your winning potential in Forex.
How will your lot size affect the amount of money you spend or make in Forex?
In lesson 4 we discussed Pips stating that a pip (percentage in point) is a measure of value change between two currencies which can be as low as 0.01 in currency pairs with Japanese Yen and 0.0001 in the rest of the pairs.
If you think of it, a 0.01 pip can only generate the lowest profits. And that’s why you need to trade more of your preferred currency to make more money.
Try adjusting lot sizes on the pip value calculator on this link and notice how the value of pips are affected.
Note: – This tool uses standard lot for calculations
Don’t worry about these calculations. Broker systems do all the donkey work so you can only focus on what’s important. Trading and making money.
Understanding What a Leverage is Forex Trading
If you have read this post to this point then you must probably be thinking, “if a standard lot is equal to $100,000 then how is it even possible for someone of my caliber to trade Forex with a deposit of $5?”
Here’s what makes it possible,
In Forex there is a concept known as leveraging.
Think of leverage as an advance or a short term loan that you get when trading Forex.
Notice something? With $1,000 your broker has allowed you to trade 500 times your deposit.
Without this advance, you would only be able to buy or sell tickets of $1,000 at a time.
So, how does this work?
Well, your $1,000 deposit is set aside by the broker who then allows you to borrow 500 times in a leverage of 500:1.
Interestingly, your $1,000 is not touched.
All losses and profits are added or deducted from your remaining cash balance and when you close your position, your $1,000 is returned to your account.
Should your balance go beyond your set margin – for the sake of our example $1,000 for a 500:1, the system automatically closes your trade to prevent loss.