Foreign currencies are traded in the Forex market in specific quantities called lots, which is the number of foreign currency units that the trader will trade through the best trading sites, whether through buying or selling operations. The lot can also be defined as a unit of measurement used to express the size of a particular trading transaction. Forex traders use different sizes of lots when they carry out trading operations within the financial market, as this is proportional to the amount of money that is invested. The greater the value of the lot used, the greater the amount. Investor and vice versa.
There are several types of lots in the foreign exchange market. Below we mention these types:
- Standard lot: It is the reference lot in the Forex market and is equal to 100,000 units of the base currency, regardless of the currency pair being traded. For example: When a trader opens a 1 standard lot position on the EUR/USD currency pair, the contract value is 100,000 EUR. In general, a small number of traders trade the standard lot because it requires a large capital in the trading account, but some traders use leverage, which facilitates the trading process once the coverage margin is provided.
- Mini Lot: The Mini Lot is used by traders across the best international trading platforms, because it provides them with the possibility of achieving lucrative returns without the need to invest large capital. The value of a mini lot is 10,000 units of the base currency, or (0.1 lot) on the trading platform. For example: when a trader makes a deal of one mini lot on the EUR/USD pair, the value of the lot is 10,000 Euros.
How are lots calculated in the Forex market?
Through the best stock and currency trading applications, a trader can calculate the price of a lot in Forex depending on the currency pair he wants to trade through, and this is done through the following mathematical equation:
Lot price = lot size * currency pair quote
For example: If a trader buys the EUR/USD currency pair and uses a standard lot and the price of the Euro (which is the base currency in the currency pair) is 1.1100 US dollars (which is the counter currency), then the lot will be calculated according to the equation:
Lot price = 100,000 * 1.1100 USD = 111,000 USD.
If a trader buys one mini lot (i.e. 10,000 units) of the EUR/USD currency pair and the price is 1.1100 US dollars, the lot price will be = 10,000 * 1.1100 = 11,100 US dollars.
If a trader buys one micro lot (i.e. 1,000 units) of the EUR/USD currency pair and the price is 1.1100 US dollars, the lot price will be = 1,000 * 1.1100 = 1,110 US dollars.
What is the importance of lots in the Forex market? Understanding the lot correctly is one of the important things in the world of trading, because it helps the trader and provides many advantages that ensure successful trading operations for him. Below we mention to you the most important benefits that a trader can benefit from through the wise and correct use of the term lot in Forex:
- Risk management: The lot size that a trader chooses can greatly affect the amount of risk he will face in trading. The larger the lot size used, the larger the potential profit or loss from the transaction and thus the greater the risk.
What are the disadvantages of lots in the Forex market?
The ability to achieve success in trading is related to how to correctly use the lot and employ it in a way that suits your trading strategy. But despite the benefits that the lot offers in the Forex market, it has some negatives that traders should take into consideration and avoid. Below we mention to you the most important disadvantages of lots in trading:
- Increased risks: Using large lots increases potential risks, as using a large lot size in trading can cause significant losses if market movements change and take directions opposite to what was expected.
- Psychological impact: The use of lots in trading may affect the trader’s psychology and his submission to his emotions, which results in incorrect management of transactions, due to the desire to achieve quick profits and the resulting bad and hasty decisions in trading.
- Relying on leverage: Using a high lot size may force the trader to rely heavily on financial leverage to execute his trades, and this increases the potential risks in the event of using high financial leverage. Because leverage is a double-edged sword, it increases the possibility of obtaining profitable profits, but it also magnifies the size of losses at the same time.
In order to be able to achieve success in Forex trading, you must be able to balance lot size and risk management, and use lots wisely according to your investment goals and the trading strategy you follow.
As for its positives: Automated trading reduces the impact of emotions involved in the trading process. By keeping emotions at bay, traders generally have a better time sticking to their basic plan. Since trade orders are automatically executed once the trade rules are met, there will be no opportunity for traders to hesitate or question the trade.
Mistakes you should avoid when determining lots in trading
There are some mistakes that novice traders make when determining the appropriate lot for the deals they open when trading. Below we mention to you the most important of these mistakes to take into consideration and avoid when entering the world of Forex:
- Some traders determine the lot size based only on the capital they trade with, without taking into account the importance of determining the lot size based on the percentage of risk they can bear in each trade.
- Some traders use a large lot size in their deals, as a large lot size means the possibility of a greater profit, but it is important for the trader not to forget the importance of carefully analyzing the financial markets and evaluating his investment level and potential risks before specifying a large lot size so that the loss does not exceed the limit He can bear it.
- It is wrong for a trader to rely on a fixed lot size at all times, and it is necessary to make adjustments to it based on the situation and trend of the market.
- Another common mistake is for the trader to rely on his feeling or intuition in the process of determining lot size, as the trader trusts his intuition and ignores all strategies and tools for determining lot size, which may lead to him incurring major financial losses.
