In the forex market, the term “lot” usually refers to the minimum transaction amount for a particular currency pair. Lot sizes will usually be expressed in terms of the base currency for that pair, but might also be denominated in U.S. Dollars due to the overwhelming prevalence of trading in that currency.
The Interbank forex market does not generally have lots or lot sizes since virtually any amount can deal in the over the counter or OTC forex market.
Instead, the concept of lots seems to have been borrowed by retail forex brokers from the futures market where currencies have traded in lots for years.
Pros and Cons of Lots
By having to use fixed lot sizes when they trade, a trader’s work is simplified to some extent since they can deal and think in terms of the number of lots rather than the exact amount of currency traded.
Nevertheless, trading in lots does somewhat reduce a trader’s ability to fine tune the sizes of their positions to the precise amount of trading risk they wish to take.
Lot and Account Sizes
Mini accounts generally involve trading lots one tenth the size of those traded in standard accounts, while micro account lots are usually one tenth the size of mini account lots.
Since trading standard lots that consist of 100,000 units of the base currency can be extremely capital intensive in an under funded account, many online forex brokers also offer mini accounts with 10,000 unit lot sizes and where the minimum value fluctuation is just $1.
Some online forex brokerages even offer micro accounts which have lot sizes one tenth the size of a mini account or 1,000 units and have a minimum fluctuation of $0.10. This type of account can be ideal for a beginner that wants to learn about trading forex without risking large amounts of money.
Lots and Leverage
A typical online retail forex broker will offer a 100:1 leverage ratio which means that only a margin deposit of 1% is required to hold a given position. In the U.S. the maximum leverage is 50:1 for majors and 20:1 for minors.
Taking advantage of this sort of leverage, a forex trader could control a position in one standard 100,000 base currency unit lot with only a 1,000 base currency unit balance in their account.
Of course, this would make holding a leveraged position at a ratio of 100:1 in such a standard lot with only 1,000 base currency units on deposit extremely risky to hold.
In fact, a sudden spike or downturn in the market adverse to your position could easily wipe out the entire account balance with a 100 pip move – just one U.S. cent or 0.0100 in the EUR/USD currency pair – which is not an uncommon size of move seen in the forex market on a daily basis.
A trader in such a loss situation would probably have their position automatically closed by their retail forex broker. Also, further trading would generally be put on hold until additional funding was provided to the account to be used as margin for trading positions.