Let’s start with an example that everyone can relate to. When you buy eggs in the grocery shop, it is impossible to buy just one egg, isn’t it? Eggs are sold in a set of 12 or more. Now, back to FOREX world!
One standard lot in the Forex market amounts to 1,000,000 (one million) units of the base currency. For example, if we are talking about EURUSD, in a purchase transaction, 1,000,000 (one million) euro will be purchased for the respective amount of US dollars. So, at the purchase price of 1.38997, 1,389,970 US dollars will be required to purchase one million Euros.
Several lots form together a total trade amount. For example, 10 lots is the amount equivalent to 10,000,000 (10 million) items of the currency we need to buy. Brokerage companies also provide an opportunity to operate with fractional (mini- and micro-lots). In particular, the LiteForex Company considers 100,000 as a standard lot and allows traders to open a transaction of 0.1 lots (10,000 units) and 0.01 lots (1,000 units).
Let’s say there is a quote for USD/CAD at the exchange rate of 1.4850. You probably wonder if it is possible to buy 1USD or 12USD … In fact you probably think that you can buy any “quantity” of USD. The answer is NO, you cannot simply buy any “quantity” of a currency. Similar to a pack of eggs, trading currency in FOREX is done in lots.
Standard lot size is USD $100,000
Mini lot size is USD $10,000
Micro lot size is USD $1,000
You can buy as many lots as you want – one, two, or a hundred. One lots means you are buying USD $100,000. Two lots means you are buying USD $200,000 and so on and so forth. There are of course FOREX brokers that offer smaller lots. What are such large amounts for? Currencies are measured in pips (the smallest increment of that currency). To observe any major profit or loss, large amounts of a currency must be traded.
As a forex trader, you have to Review your options and look for the most efficient way to limit the risks. Many strategies are created focused on risk management and money management techniques. Different lot size mean different risks. This is yet another example of how to trade safely.