In the Forex market (FX), a lot iscommonly traded in specific amounts or, in the simplest terms, the number ofcurrency units you will be purchasing or selling.
A lot is defined as a unit ofmeasurement for a specified transaction amount.
On the trading platform, orders are placed in sizesthat are quoted as lots. It’s similar to an egg carton or anegg box. Usually, when you buy eggs, you will purchase them in a carton or box,and one carton includes 12 eggs.
The standard lot size is 100,000 units of currency.Besides, there are mini (10,000), micro (1000), and nano (100) lot sizes.
LOT | NUMBER OF UNITS |
Standard | 100,000 |
Mini | 10,000 |
Micro | 1,000 |
Nano | 100 |
A few brokers show quantity in lots whileothers display it in the actual currency units.
As we previously discussed, the variation in thecurrency value relative to another is measured in pips, whichis a very, very small percentage of the currency value unit.
In order to take advantage of these frequent valuechanges, you need to trade huge amounts of this particular currency and observethe significant profit and loss value.
Let’s consider we will use a 100,000 standard unit lotsize. Hence, we will recalculate a few examples to observe how the pip valueaffects them.
1.USD/JPYat an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
2. USD/CHF at an exchange rate of 1.4555:(.0001 / 1.4555) x 100,000 = $6.87 per pip
The formula is a bit different in a few cases wherethe US dollar is not quoted first
1.EUR/USDat an exchange rate of 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 =$9.99734 rounded up will be $10 per pip
2.GBP/USDat an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 =9.99416 rounded up will be $10 per pip.
Depending on the lot size, here are a few examples of PIPvalues for EUR/USD and USD/JPY currency pairs:
| PAIR | CLOSE PRICE | PIP VALUE PER | ||||
| Unit | Standard lot | Mini lot | Micro lot | Nano lot | ||
| EUR/USD | Any | $0.0001 | $10 | $1 | $0.1 | $0.01 |
| USD/JPY | 1 USD = 80 JPY | $0.000125 | $12.5 | $1.25 | $0.125 | $0.0125 |
Your broker might have a different understanding ofcalculating PIP values in comparison with the lot size, butwhatever way they perform, they will exactly tell you what the pip value forthe currency you are currently trading is at a specified time.
Along with the market movement, the pip value is basedon what currency you are trading recently.
Whatexactly is Leverage?
You might be wondering how a small investor can tradesuch a huge amount of money.
Just assume that your broker is a bank who primarilyhelps you purchase $100,000 in currency.
However, all the banks will ask you to provide $1000as a good faith deposit, which they will reserve for you.
Is that sound true? This is how the Forex market'strading using leverage works.
The leverage amount you use will be basicallydependent on your forex broker. However, a broker must require a deposit, whichis referred to as margin.
Once the money is deposited, then you are capable ofdoing trade. The broker will also specify how much margin is needed per lot orposition traded.
Take an example: if the allowed leverage is 100:1 or1% of the lot or position, and you wish to trade a lot or position worth$100,000 but you only have $5000 in an account.
Your broker would set aside $1000 as a deposit and theremainder of the loan amount.
But of course, any profits or losses will be reducedor further added to the remaining cash balance in your bank account.
The minimum security margin for each lot will differfrom broker to broker.
In the above example, the broker needed a 1% margin.It means that for every $100,000 traded, the broker requires $1000 as a depositfor that particular position or lot.
Let’s give an example: you wish to purchase 1 standardlot (100,000) for the USD/JPY currency pair and your account is allowed to100:1 leverage, then you need to keep $1000 as a margin.
Here, the $1000 is not considered as a fee but it is adeposit.
The main reason why the broker needs the deposit isthat when the trade is open, there might be a threat that you could lose moneyon that position or lot.
Just assume that the trade of the USD/JPY currencypair is the only position that remains open in your account. Hence, you need tomanage your account’s equity (i.e., $1,000 at all times) in order to keep yourtrade open.
If the USD/JPY pair collapses and your trade lossesbecause of the account equity falling below $1000, then the broker system willbe automatically closed to prevent additional losses.
This is one of the safety measures to avoid youraccount balance going negative.
It’s really important to understand how the margintrade works; this will be discussed in our next lesson. If you do not wish toblow up your account, you must study how this margin trading works.
Further,How Do ICalculate the Profit and Loss?
As of now, you know-how to calculate the pip value andleverage, so let’s take a look at how to calculate your profit or loss margin.
Let’s purchase the US dollars and sell the Swissfrancs.
The currency rate is quoted as 1.4525/1.4530 becauseyou are purchasing the US dollars and you will work on the ASKprice, which is quoted at 1.4530 points. This is the price at which the tradersare prepared to sell.
So, you purchase 1 standard lot unit (100,000) at1.4530 points.
Hence, after a few hours, the rate changed to 1.4550points, and you decided to close the trade.
The new quote for the USD/CHF currency pair is1.4550/1.4555. You are required to purchase to open the trade and to close thetrade. However, you must sell the pair in order to close the trade, and youmust take the BID price at 1.4550 points, which is the ratethat the traders are prepared to purchase.
The difference between the values of 1.4530 and 1.4550is 20 pips, or.0020 pips.
By using our formula, we now have (.0001/1.4550) x100,000 = $6.87 per pip x 20 pips = $137.40.
BID/ASKSPREAD
Remember that the spread in the bid/ask quote applieswhen you enter or exit a trade.
You will utilise the offer or ASK price when purchasing a currency.
You will utilise the BID price when selling.
Following that, we'll give you a rundown of the mostrecent forex lingos you've picked up!
Read More Article:
How to invest in Foreign Exchange Market (FX) Step bystep in 2022
How to make an investment in foreign exchange market?
How to invest in forex market in 2022
What is the Best Way to Make Money Trading Forex?
In Detail, What Is The Forex Market (FX)?
In the Forex Market, What is actually traded?
Currency Pairs: Buying and Selling
What is a pip in forex trading?
The Different Types Of Forex Trading
Forex Market (FX): It’s Size and Liquidity
When to Buy and When to Sell a Currency Pair
Forex Trading For Beginners: A Guide To Making ProfitsFrom Currency Trading
Learn to Trade with Best andTrusted Global Broker
Start your journey withus and learn from basic to advance with one to one training session. Get fullknowledge about the market from our expert team and become expert in market.
Free Enquiry Now:Click Here
- Forex Market
- Currency Trading
- Forex Trading For Beginners
- Forex Market For Beginners
