What is a lot?
A lot refers to the standard unit of measurement for the transaction volume. There are different types of lots, including standard lots, mini lots, and micro lots, each representing varying amounts of currency.
A standard lot is equivalent to 100,000 units of the base currency, a mini lot is 10,000 units, and a micro lot is 1,000 units. The lot size determines the potential profit or loss on a trade, with larger lots carrying higher risk and potential reward. Understanding lot sizes is crucial for managing risk and determining position size in forex trading.
Example of a lot
Let’s say you are trading the USD/JPY currency pair, and the current exchange rate is 110.00. If you decide to buy one standard lot of USD/JPY, you are effectively buying $100,000 worth of US Dollars.
If the exchange rate moves by 1 pip (which is the smallest price move that a given exchange rate can make), it would be equivalent to a $10 profit or loss, depending on the direction of the price movement.