ForexNewsNow – Although a relatively unknown concept in the professional Interbank forex market, just about all online forex brokers in any given brokers list will have a minimum transaction amount known as a lot size that applies to all forex transactions for a particular currency pair made in a customer’s online trading account.
This concept of trading lots seems to have been borrowed from the futures markets where currencies historically traded in lots. Also, several lot sizes are in common usage among currency brokers, sometimes even at the same online forex broker.
Listed from smallest to largest, these lot sizes include micro, mini and standard lots that will each be described further in the sections below.
Micro lots are the smallest lot size typically offered by an online foreign exchange brokers. They usually only consist of 1,000 units of the base currency for a particular currency pair.
As a result, owning a single GBP 1,000 micro lot in your online trading account in the GBPUSD currency pair will result in a value fluctuation of $0.10 for a one pip movement seen in the exchange rate for GBPUSD.
A small number of micro lots can make a perfect trading vehicle for novice or poorly funded traders to get started trading in a live forex dealing environment without taking too much risk for them to handle comfortably.
More sophisticated currency traders can also use micro lots in larger quantities to help fine tune a trading strategy or when detailed position sizing is involved in a money management program.
Mini lots are the intermediate lot size offered by online foreign exchange brokers. For any particular currency pair, they are usually made up of 10,000 units of the base currency.
Therefore, owning a single EUR 10,000 mini lot in your online trading account in the EURUSD currency pair will result in a value fluctuation of $1.00 for each pip of movement in the EURUSD exchange rate.
Mini lots are frequently used by more experienced traders as their risk tolerance and account funding permits. They tend to provide extra flexibility in position sizing compared with standard lots.
Standard lots are the largest lot size typically offered by online currency brokers. They usually consist of 100,000 units of the base currency.
Accordingly, owning one AUD 100,000 standard lot in an online trading account in the AUDUSD currency pair will give you a minimum value fluctuation of $10.00 for each single pip of movement observed in the AUDUSD exchange rate.
Standard lots are primarily only used by experienced and well funded forex traders or perhaps those traders that have an especially high risk tolerance. Nevertheless, many very experienced traders feel rather constrained when making position sizing decisions using only standard lots, and so they might prefer to use mini or even micro lots instead for the greater flexibility they provide.
Using Leverage to Magnify Lot Sizes
Since most online forex brokers offer significant leverage ratios to their forex trading clients, many traders are tempted to trade forex on margin where they only put up a portion or percentage of the funds that otherwise would be required to hold a forex position.
Unfortunately, using a fairly common leverage ratio of 100:1 can allow a trader — who perhaps should be trading micro lots from a money management or experience perspective — to trade the risk adjusted equivalent of a standard lot.
Novice or poorly funded traders would therefore be well advised to minimize the use of leverage when trading in order to make the usual forex trading mistakes considerably more affordable to their online trading account.