What are LOTS in forex trading?

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In this article we will explain in a simple way what a lot is, what types there are and how they are calculated.

What is a lot explained in simple terms

A lot is the standardized unit for buying and selling on the foreign exchange market. It means that participants in this market trade any number of lots of the currencies of their choice. The term lot means 100,000 units of the currency or currency sign or currency of choice.

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Let’s take an example with the US Dollar (USD) and the Euro (EUR) as the most traded currencies:

10 lots USD equal 1,000,000.00 USD, since each lot consists of 100,000 units of the chosen currency 10 lots USD = 10 x 100,000 = 1 million.

2 lots EUR correspond to 200,000 EUR. 2 lots EUR = 2 x 100,000 = 200,000 EUR.

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To put it another way. When buying and selling a good or product, all parties involved, both buyer and seller, must use the same unit of measurement.

Examples of different units of measurement are kilo, dozen, meter, lot, mini-lot and others.

When we talk about the foreign exchange market, lots are the unit of measurement used.

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What are lots for?

Transactions in the foreign exchange market are made by buying and selling a certain number of lots.

Example: We buy 3 lots of USD/EUR, which corresponds to a purchase of 300,000 USD.

So the amount we buy or sell determines the volume of our trade.

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Trade volume is crucial in trading because it determines the risk of our trade: how much we can lose if the price goes against us. It also tells us how much we will earn if the price moves in our favor, so we have determined the risk/reward ratio of our trade.

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Types of lots in Forex trading

In the forex market, a lot always refers to 100,000 units of a currency, just as a dozen always refers to 12 units.

However, to make it easier for a larger number of people to participate in the market, brokers offer the possibility of investing or trading smaller amounts than a lot. Smaller amounts are obtained by dividing a lot into smaller parts:

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Mini lot: equivalent to one-tenth or 10% of a lot and equal to 10,000 units of a coin.

Microlot: equivalent to 1% of a lot and equal to 1,000 units of a coin.

Nanolot: is exceptionally offered by some brokers and can be equal to 100 or even 10 units of a coin, depending on the trading platform.

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How to calculate the number of lots in Forex

When investing in Forex, you need to know two basic features in advance:

First, the currency pair to invest in.

Second, the number of lots to be purchased, which is represented by the amount of money the buyer is willing to risk. Remember that the number of lots directly determines both the profit and loss capacity of a given open position.

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To help calculate the number of lots appropriate for the investment strategy, brokers and some websites offer calculators.

The way it works is simple: we enter the variables we are asked for and click Calculate: As a result, we get the number of lots to buy or sell according to our trading plan and the data provided.

The data to be entered are:

Currency pair. Here you can select the currency pair you want to invest in. Remember that the first currency or base currency is the one you buy and the second currency is the one you pay with.

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Account currency. The currency of your account, usually euros or dollars.

Account size. The total amount available in your account for trading or investing.

Risk Ratio %. The amount or percentage of risk we take when trading determines what percentage of your account balance you are willing to invest.

Stop Loss Points. In case the market moves against us, we specify at what point we close the trade. Profit or loss is always measured in pips.

Contract size. Minimum investment size, usually one lot or 100,000 units.

Summary

Currencies are exchanged or traded in units called lots.

A lot is the unit of measurement used to buy or sell currencies in the Forex market.

A lot always refers to 100,000 units of the chosen currency.

Smaller units obtained by dividing a lot by 10, 100 or 1000 can be used. They are called mini-lots, micro-lots and nano-lots, respectively.

There are lot calculators that allow calculating the amount of purchase for a particular investment strategy or calculating the amount of purchase for a particular investment strategy.

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