One of the key terms that you are bound to come across time and again in forex trading is “lot”. Here we will take a look in more detail about what exactly a lot is in forex so the next time you are trading lots, you will understand exactly what is entailed.
Beyond that, we will also look at the various types of forex lots you can encounter when trading with your top forex broker. Some of these will be more ideally suited to new traders or those who many want to steer a little on the safer side when it comes to risk management in trading.
Forex Lot Types Explained
In the simplest of forms, the forex lot as you know it in forex trading, is simply a measurement of currency units and a way of determining how many currency units are required for a trade.
Forex lots and the terminology around lot trading is widely used still among almost all of the top trading brokers in the sector. Even though a few now allow for more flexible trading styles, mention of forex lots is still very prevalent. You will also hear plenty of mention of forex lot, and lot trading if you are choosing a new broker and checking out some of the best forex broker reviews.
With that in mind then, there are typically 4 forex lot sizes that you will come across when trading forex.
Standard Lot – 100,000 Currency Units
The standard forex lot is what you will see most commonly when trading with the standard account types of many forex brokers. The standard lot is 100,000 currency units, so typically has a value of $100,000 if we take trading in US Dollars as an example.
The majority of experienced forex traders are accustomed to trading at this level and it is worth noting that due to leverage in forex, you do not need to have a full $100,000 in your account to trade a standard lot. When most refer to a lot in forex trading, this is also the typical value they are referring to.
Mini Lot – 10,000 Currency Units
A mini forex lot is a great choice for those who may want to trade with a lower, or perhaps no leverage at all. This type of lot is again very common with most top forex brokers offering these types of lots that contain 10,000 currency units which would have a typical value of $10,000 if trading USD.
Even though they are referred to as “mini” lots traded at this level still represent a very significant investment for many traders.
Micro Lot – 1,000 Currency Units
A micro lot in forex is the next smaller step on the trading ladder again. Coming in at just 1,000 currency units means that this value in the case of our USD trading example would be just $1000. While micro lots and forex micro trading accounts are available with some brokers, they are not always accessible. They do however provide another ideal platform for new forex traders to get a good,value for money taste of the industry. This level can provide an excellent stepping stone for those who may have already tried out a nano account or wanting to move straight from demo account trading without committing 100%.
Nano Lot – 100 Currency Units
The smallest trading lot size available is the nano lot. This trading lot is comprised of 100 currency units which have a total value of $100 in the case of our USD trading example. The nano lot is again more rare to see, but is certainly still available with many top forex trading brokers. This is a very ideal starting lot size for those who wish to try out forex trading for the first time. It offers real money trading beyond a demo trading account, but with a much smaller level of risk involved.
Forex Lot Differences Between Brokers
As with everything, there is some room for variation within the forex trading sector. The terms described above are generally used by both traders and brokers across the board. You will sometimes see lots described in decimal terms in comparison with a standard forex lot as follows:
Mini Lot: 0.1 Standard Lots
Micro Lot: 0.01 Standard Lots
Nano Lot: 0.001 Standard Lots
This is exactly the same thing in the majority of cases. Many brokers also make “cent accounts” available that often cater for the smaller lot sizes in micro lots and possible nano lots. There are also a few brokers that will allow trading with as little as 1 currency unit ($1).
Which Lot Size is Best for Forex Market Trading?
The forex lot size that works well for you is really dependent on a number of factors based on how you want to trade. Among these is how much you have to risk, and how much of your capital you actually want to risk. Once you have decided this, you will be better placed to choose the ideal lot size for you. You should also remember that you can still engage leverage when trading with smaller lot sizes, though the ratio will not increase.
Typically, as you gain more experience in the forex trading industry, your attitude and willingness to take on slightly more risk lends itself well to increasing lot size. With this in mind then, many would recommend graduating from demo account use to a nano or micro lot size. Once you have learned the ropes with these, you can move on up to the next levels.
If you are dealing with a top forex broker, you will also note that many of them may have loyalty, active trader, or rebate programs in place. These often reward traders based on the number of standard lots they trade. Considering that then, it may be one point to think of when choosing your forex lot size.
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Forex Market Boosted by Record US Jobs Data
- Payroll Data Smashes Expectation for June
- USD/JPY Increases on Optimism
- Asian Markets also Open Strong on Friday
US markets received an unexpected but welcome boost on Thursday. The release of nonfarm payroll numbers showed that the economy added a huge number of additional jobs beyond expectation. Unemployment numbers also fell. The positive ripple from this has been felt in the forex market around the world with early trading in Asia showing the Japanese Yen up slightly, and a positive start to the day in China, where PMIs came in strong, and other parts of Asia.
Largest Single Month Job Gain in US History
The numbers reported yesterday in terms of US nonfarm payrolls have easily eclipsed previous highs in terms of being the largest single month job gain the country has ever seen. Analysts had forecast a still impressive gain of 2.9 million jobs added, though the actual number came in much greater at 4.8m. This was quickly heralded by President Trump as a sign of the “economy roaring back”. Wall Street also reacted positively on the back of the news, with the Dow Jones rising more than 400 points.
The Labor Department also confirmed that unemployment had fallen more than expected, to a number of 11.1%. This is the lowest since the coronavirus pandemic started. Though these numbers may not paint an entirely accurate picture since they fail to capture the period when states started to rollback their reopening measures, they have still provided a timely economic boost.
JPY Moves Slightly Higher but Remains Hampered
The USD/JPY is one of the most traded markets in the world. Forex brokers though have noted that the market has been trading without much direction for some time. The pair was boosted slightly to a high of just below 108 on news that the US jobs data had come in much better than expected. This positive move was tempered with caution though amid the increasing concern with COVID-19 cases increasing across many American states.
As a well-known safe haven currency in times of difficulty itself, it may be some time before those forex trading the Yen feel like moving out of that safety zone. Later today, Japan will publish their own bank services PMIs from June. Should this number come in greater than expected, it may provoke an additional boost in the market.
Chinese and Other Asian Markets Positive
Yesterday’s positive news from the US has extended into the Asian trading session on Friday. Markets opened strongly across the Asia Pacific region. The Shanghai Composite index jumped almost 1.5% in early trading, with major indices in Japan, South Korea, and Australia, also displaying positive signs.
Markets were further buoyed by the release of Chinese PMI data from the services sector which showed a number of 58.4 for June. This would indicate the sector is growing at the fastest rate since 2010 after much of China returned to normal activity in the month of June.
What are Carry Trades in Forex?
As you continue increasing your knowledge about forex trading and the market in general, more and more new concepts and ideas will pop up. This includes a growing range of trading technique and strategies. One such trading strategy which has been around for a very long time in the industry, is the carry trade. Here we will take a closer look at exactly what a carry is in forex, and provide all the information you need to decide if carry trading is a good strategy for you as you move forward on your trading journey.
The Basics of How a Carry Trade Works
In its most simple form, a carry trade in forex, is borrowing one currency, and using it to buy another. For example, you may borrow (sell) $100,000 Australian Dollars, and use those funds to purchase the same amount of JPY. Placing a carry trade is one of the most popular trading strategies in the entire sector, and used by many traders to benefit from the position of currencies around the world.
So, what is the benefit in borrowing one currency and using it to buy another? This comes from the difference in interest rates between the two currencies. Let’s look again at our example in more detail.
Presuming the interest rate on the Australian Dollar was 4%, and the interest rate on the JPY was 0.1%, a carry trade would be where you buy the AUD/JPY market, as here, what you are effectively doing is selling (borrowing) Japanese Yen, to purchase Australian Dollars. In the most simple of ways, you will now have placed a carry trade. Here you will earn 4% interest on the Australian Dollars you are holding, while paying 0.1% interest on the Japanese Yen you have borrowed. This should leave you in a profitable position if the rate does not change, and is known as a positive carry trade at +3.9%.
Why is Carry Trading in Forex So Popular?
From an outside perspective, even looking at our hypothetical example where there is quite a gap between the interest rates, you may wonder why placing carry trades is so popular when the potential profit may seem quite small. There are two main elements at play in the forex market though which make this a very attractive type of trading strategy.
Currency Pairs: The fact that currencies are traded in pairs make a carry trade very accessible, and convenient for all traders. The difference in interest rates has never been so easy to take advantage of as it is in forex trading, where you can directly trade low and high interest currencies in pairs.
Leverage: The availability of extensive leverage in forex makes it the ideal place to carry trade. Many forex brokers can make leverage of up to 500:1 available on certain currency pairs. This basically means that even a relatively small deposit of $1,000 can open up huge buying power of $100,000 at 100:1 leverage, or more. Dealing with such large numbers, even low percentage profits are very meaningful.
Popular Forex Pairs to Carry Trade
Given the fundamentals of how a carry trade works, borrowing a low interest currency, to buy a high interest currency, then this is precisely what traders are on the lookout for in the forex market when it comes to placing a carry trade. There are a couple of currencies in particular that are most popular in this regard.
As a selling currency, the Japanese Yen is always a very popular choice. This is thanks to the historically very low cost of borrowing in Japan. The country has not had an interest rate of above 0.5% in more than 20-years. Another popular choice as a selling currency may be the Swiss Franc (CHF).
On the buying side, popular choices include both the Australian, and New Zealand Dollar as countries which typically hold slightly higher interest rates, yet are recognized as quite stable currencies.
Benefits of a Carry Trade
A carry trade in forex can be an excellent long-term investment strategy. You will have the potential to benefit from a carry trade even if the rates do not change at all thanks to the difference in interest rates. This makes it perfect for an investor who intends to hold the position for a long time.
Added to that, if the rate does change in your favor, then you can potentially have a sizable profit when added to the interest rate difference, and factoring in the leverage used. The fact that many brokers nowadays also cater for trading with very competitive fees and low spreads also plays to your advantage if placing a carry trade, and is something that many look out for.
Risks Involved in a Carry Trade
With every form of trading, there is always a certain element of risk. With a carry trade, though it is seen as a low-risk strategy, there are still a couple of things to be mindful of.
The market can still move against you. A change in the market can certainly negate any benefits you have gained from the positive interest rate difference. Particularly if you decide to trade in minor, or exotic currency pairs which are less common, you should note that these markets can be highly volatile, and subject to change in a very swift fashion. Some examples include trading with the MXN (Mexican Peso), or NGN (Nigerian Naira). Both may appear attractive for a carry trade, but can be subject to intense volatility. This risk can be amplified even further if you are trading with a lot of leverage.
You should also remember that, just because there may be a positive rate difference at the moment, the monetary policy in every country is subject to change at different times. The perfect example of this would be right now, in the midst of the coronavirus pandemic, many nations have moved to cut interest rates. This has the possibility to really change the dynamics of your carry trade.
Forex Market Majors Trading Lower Amid Coronavirus Concerns
- GBP/USD Struggling after GDP Dip
- EUR/USD Also Sluggish as States Halt Reopening
- Markets Await Key Testimonies After Monday Surge
Major currencies in the forex market are trading slightly lower today. Both the Euro, and Pound have dropped back against the Dollar as concerns over a spike in Coronavirus numbers persist. The final UK GDP figures for the first quarter released today, were also worse than expected. Meanwhile, US markets are looking quiet after a strong rally to open up the week on Monday. This may change as the day progresses and today’s testimony from the Fed Chairman is digested.
UK Suffers Biggest Quarterly GDP Decline Since 1979
Forex trading in the GBP/USD market today was struggling below the 1.23 mark for a number of reasons. One of the major points which seems to have rocked trader confidence in Sterling is the release of GDP figures for the first quarter today. These show a 2.2% drop in GDP, worse than had been expected.
This GDP drop is the largest the nation has seen in more than 40 years. It is compounded by the fact that a double digit drop is expected in the next quarter, and also the fact that a new spike in cases has led to local lockdown in at least one British city. British leader Boris Johnson is due to speak later today where he will introduce plans to inject more than £5 billion into infrastructure in a bid to bolster the economy.
Euro Also Drops Back as Virus Concerns Persist
The EUR/USD is looking to end the quarter in successful territory today although that has been threatened by negative pressure which has pushed the pair down at the beginning of the day. Forex brokers noted that traders are appearing to favor a move back toward the safety of the US Dollar.
This move has largely been led by the uncertainty of the US economic situation as several states have now moved to impose renewed restrictions, or halted their reopening plans as cases of COVID-19 continue to rise again in many areas. This has been the case in New York who have slowed reopening, as well as in Texas and Florida where renewed closures have been put in place on many bars and restaurants after cases in those states showed a heavy increase.
Market Opening Appears Quiet as Traders Await Testimony
Today’s market opening on Wall Street would appear to have hit a lull following yesterday’s great surge to begin the week. The Dow Jones rose more than 500 points yesterday to get the week off to a very positive start. The picture today, pre-market numbers have indicated, is much less active. Many could be awaiting the remarks of Federal Reserve Chairman Jerome Powell, who will address the House Financial Services Committee later today.
These remarks are expected to raise more questions than answers though, with Powell set to comment that the path forward remains very uncertain, and reliant on successfully containing the virus.