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 What is a lot in forex?

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painofhell



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Birthday : 1990-05-18
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PostSubject: What is a lot in forex?   Mon Oct 27, 2014 5:22 pm

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In the previous article you learned what is pips and how to calculate the value of a pip You probably remember that we got some extremely low pip value, on USD/CHF one pip was worth only 0.00009250 USD.


Well, $0.00009250 USD is the value of a pip per unit and the standard size of a lot is 100,000 units of the base currency. To open a trade, you need to buy or sell one or more lots. So, if you open a long trade with one standard lot on USD/CHF, you would be buying 100,000 units. Since USD/CHF has a per unit pip value of $0.00009250 USD, your pip value would be $9.25 USD per pip ($0.00009250 x 100,000 units).
$9.25 USD per pip may sound like a lot. However, there are several different lot sizes in Forex:

  • Standard lot = 100,000 units of base currency

  • Mini lot = 10,000 units of base currency

  • Micro lot = 1,000 units of base currency

  • Nano lot = 100 units of base currency


Nano and micro lots are a fantastic way to trade Forex without risking much money. When you first start trading, you do not want to be trading standard lots. If each pip is worth $9 USD, and you lose 100 pips, thats $900 USD gone. Micro lots allow you to learn forex without risking the house.


Now you can calculate the value of a pip per lot. The pip value we calculated in the previous article was based on a single unit. So, for every unit traded on a GBP/USD trade a pip is worth $0.00009998 USD. With a mini lot you have 10,000 units open, so each pip will be worth $0.9998 USD. Calculating how much you will make per pip on a trade is straight forward.


First step: Calculate the per unit value of a pip.
USD/JPY = 96.27
0.01 / 96.27= 0.0001038 1 pip = 0.0001038 USD per unit

Second step: Multiply the per unit value by the lot size you are using.
0.0001038 USD x 10,000 units = 1.038 USD

If the US dollar is not quoted first and you want the pip value in US dollars, the formula is a little different.


First step: Calculate the per unit value of a pip.
GBP/USD = 1.6443=
0.0001 / 1.6443= 0.00006081 1 PIP = 0.00006081 GBP

Second step: Multiply the per unit value by the lot size you are using.
0.00006081 USD x 10,000 units = 0.6081 GBP

Third step: Multiply the value per pip by the rate of the pair.
0.6081 GBP x 1.6443 = 0.9998 GBP

Round this up to $1 per pip.
These numbers still don’t seem very good. Why would you want to invest $10,000 and earn only $1 per pip? Well, with leverage, you don’t have to invest that much.

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What is a lot in forex?

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