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AB08 - What is a Lot in Forex?

"In trading, you will always have to start by purchasing a standard unit of the currency pair. The standard unit is nothing but the contract size. Contract sizes are important because they are standardized. This is one of the unique features of the forex markets. Typically, standardized contracts are available only in exchange traded instruments. But forex is an exception. In this article, we give you the lowdown on what is a lot in forex. Understanding how a lot works and the various other units of contracts are important. You will find that this will be applicable especially when you trade on leverage. Based on the lot size you trade, the leverage can differ. The lot sizes also influence how much of profits or loss you can estimate from your trade’s position. We also go a bit deeper and illustrate how you can find out the value of a pip among the various currency pairs."

A lot is the name given to the size of units that you will be trading in forex. As you might know, almost all financial products follow a standard convention. This standard convention makes it easy across the markets to buy and sell with ease.

A lot in forex therefore defined as the amounts of units of currency that you want to buy or sell. These units are standard sizes which means that you can only follow these conventions.

The contract sizes or lots are as follows:

Lot / Contract Size Units (of base currency) In pip value (1 pip = )
1 Lot / Standard 100,000 $10.00
0.1 Lot / Mini Lot 10,000 $1.00
0.001 Lot / Micro Lot 1,000 $0.10

Besides the above three main types of lots, sometimes you will also come across a nano lot. A nano lot is the smallest and it represents 100 units of currency. These are not that commonly used. In many professional trading platforms, the above three lot sizes are what you will get to see more commonly.

Based on the lot size that you transact, the dollar value for a one pip move will also change accordingly. For example, going back to the above table, if you purchased a standard lot, you will notice that a 1 pip move in the currency pair will lead to a $10 move in dollar value.

Lot sizes are most commonly used because they are standardized formats. Therefore, regardless of which forex broker you trade with, you will find the lot sizes to be the same. This makes it easy to buy and sell the forex positions easily.

We should note that in the above example, the dollar values represent the four decimal currency pairs, such as the EUR/USD and so on.

When it comes to the JPY currency pairs, which have two decimals a third fractional decimal pricing, the convention is somewhat different.

How to calculate the dollar value of a pip based on contract size?

One question that comes to mind is how you can get the dollar value of the pip. While it is important to understand the math behind this, there are a number of online forex calculators that will help you do the math automatically.

Let’s take a look at how to calculate the pip value in forex based on the contract size. This will also give you a clearer example of how the dollar value changes when you trade JPY currency pairs.

To get the dollar value of the pip, you simply take the units and divide it by the current exchange rate (it does not matter if you are using the bid or the ask price) and them multiply it by the total units.

An easier calculation is to simply take the smallest unit of change in the currency pair and multiply it by the contract size.

For example, in a EUR/USD currency pair, we know that the smallest unit of change is 0.0001. Therefore, to get the dollar value of a pip if you were using a standard lot, you would multiple 0.0001 x 100,000 = 10, or $10.

Using the same convention, you can apply it to JPY currency pairs too. In JPY currency pairs such as EUR/JPY, USD/JPY and so on, you will notice three decimal pricing. The third decimal is fractional pricing which we are not interested in when calculating the pip value.

Therefore, you simply now take the smallest unit of change which 0.01 and multiply it by the contract size.

If the USD/JPY has an exchange rate of 110.00, then firstly you need to convert this into its inverse. So, 1/110.00 = 0.0090. In other words, 1 JPY = 0.0090 USD. We now divide this further by 10, giving a result of 0.00090.

Multiply this by the units of the contract size.

0.00090 x 100,000 = 9JPY

With the JPY currency pairs, note that the pip will be constantly changing.

Besides the USD as the quote amount and the JPY pairs, you will also come across cross currency pairs. Cross currency pairs are those where the USD is neither a base nor a quote currency. An example of this is EUR/GBP or AUD/NZD.

In this case, you simply follow the convention outlined for calculating the four decimal currency pair and then apply the prevailing USD rate.

For example, if EUR/GBP when you trade a standard lot size, the pip value is equal to 10 euro. Now apply the EUR/USD rate. If the EUR/USD rate is 1.100, then multiply 10 by 1.100 to get $11 as the pip value for the EUR/GBP currency pair for a standard lot size.

Read 610 times Last modified on Saturday, 08 June 2019 08:26

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