The Ultimate Explanation for the Term Forex Lot

Contributed article in our financial series. Enjoy! – Kimberly

Very few people have a clear knowledge of the term, “LOT”. We are going to familiarize you with the size of the lot, how you can trade with your small benefit in the Forex market and how to calculate your profit or loss in Forex. 

In Forex, the standard lot size is 100,00 units, which is 100k. There are other sizes of Forex lot. They are mini, micro, and nano. Here is a graph to show you the lot size.

Forex Lot size

From the previous article, you will have understood how the movement of pips contributes to your money-making in Forex. When the movement of your pip is positive, you make money. If it is negative, you lose money. You can take the benefits of pips, a very small incremental change of your trading to make a big money out of your trade. Those who prefer to trade commodities know very well that how a slight change in the pip value can alter their profit factors.

For example, consider that you have a standard lot, which is 100,000 units. If your value moves 10 positive pip, then you are making a lot of money by this very small change. Here is a graph to show you the contribution of pip you need in your lot size to make money in your trading.

Forex pip contributing money-making in lot size

Understanding leverage

When you first go to open a bank account, you were asked to deposit $2,000 dollars in your account. You can withdraw these dollars from your account at any time, but as a sign of trust in banking with this bank, you are asked to deposit that amount of money. With this leverage, you are asked to deposit a fixed amount of money but have the freedom to withdraw at any time if you wish. 

Forex trading is also involved in leverage. For example, if you have only 1000 dollars in the account, but you want to trade 10,000 dollars. In that case, your 500 dollars will be put down and you will participate in that 10,000-dollar trade. If you lose money, your account will be decreased by that amount of money. If you earn money and your account balance will get bigger.

Making money or losing money in Forex

Making or losing money in Forex is very easy. Pip will largely contribute to that money-making. We are going to show your very simple example of Forex trading that you can understand, how your pip movement can make money according to your lot size.

Think of the example of Peter selling socks to people. Imagine Peter as a wholesale seller who has bought 1000 pairs of socks for 2 dollars each. The total cost of his lot is 2000 dollars. The socks are of good quality and his customers like the socks. Within 2 weeks, Peter sold all the socks to different customers.

They all paid only 2.5 dollars for each pair of socks. Now you can think that his profit is very small, only 50 cents for each pair and 1 dollar for 2 pairs. By doing a simple calculation, we can find out that Peter made a profit of 500 dollars for the total 1000 pair’s socks which he bought for only 2000 dollars and sold for 2500 dollars.

This is the simplest example that you can be given to give you the sense of lot size in making a profit in Forex. If your pip movement is very low yet your lot is very big, you can make a handsome profit out of your trade. Your profit will be small though if you trade on a large pip if your lot is smaller. To ensure the safety of your trading capital, determine the lot size very precisely during the trade execution process. A small mistake can cost you dearly in the real market.

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