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.
What is Leverage in Forex?
Regardless whether you are a brand new trader in the forex market or someone with extensive experience, you will have certainly encountered one thing on your journey. Leverage. If you are new to forex trading then you may wonder exactly what is meant by this, how you can utilize it, and what kind of leverage is available from your forex broker. Since every top forex broker around the world offers some kind of leverage, we will cover the main points of leveraged trading here. This should help you make the best decision for your trading future when selecting your next broker.
The Basics of Leverage in Forex Trading
In its most simplistic form, leverage is simply money borrowed from a source that can increase the size of position or amount of capital that is available to you. In this case, the source that you are borrowing money from in the form of leverage, is your broker.
The amount of leverage that you can benefit from will depend primarily on two factors:
- Where your broker is based and regulated.
- Which assets you want to apply leverage to from your broker.
These are two of the most important factors when looking at how much leverage may be available to you as a standard forex trader. Here we will take a closer look at how much leverage you can expect to receive.
Typical Amounts of Leverage Available in Forex Trading
This varies around the world and between different brokers, but can go up to as much as 100:1 or more with certain brokers. Forex trading leverage is most commonly expressed in this ratio format and indicates in our example that with a $1 balance of your own funds, you could open positions worth as much as $100.
As mentioned, the leverage available will depend heavily on where the broker is regulated. The most prominent example of this is within the EU. Due to ESMA (European Securities and Markets Authority) regulations, all brokers are restricted to offering a maximum leverage of 30:1 regardless of the market traded. Effectively, this means that you can only borrow a maximum of 30 times your capital balance to trade with. The idea here is to protect traders from becoming excessively involved in leveraged trading where losses can mount quickly.
This is typically more than enough leverage and is usually only available within the major forex currency markets which are often viewed as less volatile. With a 30:1 leverage and a deposit of $100, you could hypothetically open positions to the value of $3,000.
In other markets such as minor forex currency pairs, CFDs, and cryptocurrency trading, the leverage available can be considerably lower anywhere from 1:1 (no leverage), through 5:1, 10:1, 20:1 depending on the risk of the market.
If you happen to be a more experienced trader, then of course the broker may be more likely to approve a higher leverage, and for traders who can open professional trading accounts, these limitations can be stretched further.
The Benefits of Leverage in Forex Trading
The key benefit and reason why many traders employ leverage when they are trading forex is the potential profitability.
Forex trading is a huge volume trading market, the biggest in the world of trading. If you have looked at our recent article on forex lot size, then you will know that the typically standard lot size is 100,000 currency units. This can mean a cost of $100,000 to trade just one standard lot.
So, instead of putting a full $100,000 or more on the line, many forex traders will use leverage. Utilizing the maximum EU broker leverage of 30:1, you could then trade with up to $100,000.
This effectively means that through increasing your leverage, you can also increase your purchasing or trading power to take more advantage over changes in the market.
Risk management can also be a second area where, if well-considered, can definitely benefit from utilizing leverage in forex. As mentioned above, you will not want to risk your entire balance on just a few trades in the forex market, instead, you can use leverage to only commit a small percentage of your balance yet still fill the position.
The Cost and Risks of Using Leverage
When you do decide to utilize the leverage on offer from your broker, besides the positive potential and benefits that we have mentioned, there are naturally some costs and risks involved.
Thinking of the costs first, your margin will go up depending upon both the size of the positions you open, and also how those positions move while they are open. Taking a look at our recent article on margin in forex trading will help you to gain a deeper understanding of how the margin works but it is certainly something to keep an eye on when using leverage.
The main risk when dealing with leverage is connected to the increased size of your positions. This means that when the market moves the size of your profits or losses can be greatly amplified. On the positive side, this of course can mean you make money quicker when the market moves in your favor. On the other hand though, you can also rack up quick losses.
Choosing the best forex broker who also provides negative balance protection, and employing an astute risk management plan that you stick by are two things you can do that will help you successfully manage your trading on leverage.
Final Thoughts – How Much Leverage Should I Use?
So, you have opened your forex trading account and been approved for leverage from your broker. The common temptation is to use as much as possible. In reality though, you need to do an impartial assessment of your position and not engage more in leverage than you can afford to lose. Particularly if you are a new trader, the recommendation would be to start small with the leverage and continue learning as much as possible through any educational content provided to help improve your knowledge and skill as a trader.
USD Starts to Consolidate as Global Forex Market Takes Stock
- USD bullish pattern begins to slow
- Data and prospect still remains very positive
- 225,000 non-farm payroll jobs added in January
The USD had shown strength to a certain degree over the closing days of last week in a global forex market that has been dogged with fear in recent days and weeks. With many of these traders now deciding to take some of their profits, the market has started to consolidate gains on currency pairs around the world. This is true of the USD/CHF, USD/JPY, and many other benchmark major forex currency pairs across the market.
What has caused the USD forex market consolidation?
This is a consolidation that had begun just prior to the beginning of the weekend and came after the U.S. had posted better than expected job data. This kind of movement is common across markets particularly when traders have gotten ahead of the projected good news and then look to take their profits on its release. This is precisely what seems to have happened here.
With nothing in particular of huge significance on the US economic calendar for Monday, it may also be a case that traders Stateside see little to gain at the beginning of this week and have adopted a risk-averse approach. This similar approach in Europe has seen several indices slide alongside the 10-years US Treasury bond which has fallen by almost 2%.
New increases still remain very possible
Despite the consolidation, almost every piece of data coming from the USD forex market and wider economy to start the week points in only on direction. This direction is upward. Not least of this can be related to the very good jobs data release. A greater than expected increase on US Non-Farm Payrolls of 225,000 along with another better than expected wage rise number at 3.1% are all excellent. Although this was accompanied by an unemployment increase, that number also remains keenly low at 3.6%.
USD still a global go to currency in times of need
Another huge factor that can continue to bring the market into the USD is the ongoing Coronavirus situation that has now spread around the world. This is good news for nobody and has in fact greatly dented the global economy. With that said though, this, and other types of crisis situations will ultimately serve in bolstering global “safe-haven” currencies.
This likely means the most to the Japanese Yen, the JPY is well-known as the number-one currency that traders flock to in times of difficulty. The USD though is a close second in this area and well above any of the other major forex currencies in terms of trust score among traders. Expect further gains on the USD side of these markets if the virus continues to spread after the Chinese return to work following an extended Lunar New Year Holiday
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GBP Forex Market Remains Sluggish Post-Brexit
- GBP/USD Trading remains stagnant almost one-week later
- Further rocky road ahead as tough negotiations expected
- Lowest point of year to date reached with further expected
After a long, contentious period of wrangling, Britain finally exited the European Union on January 31st at 11pm. This brought the curtain down on 47 years of membership with promises of forward movement from UK leader Boris Johnson. Negotiations are now set to begin on how the post-Brexit era will play out in many important areas including trade and freedom of movement. This has not gone unnoticed within the market, the GBP/USD market falling below the significant psychological benchmark of 1.30.
No significant progress since exit
As we set up for the beginning of talks on how the post-Brexit reality will look, and be implemented from all sides, there has been a lot of conjecture. This has certainly not provided any solid direction for the market as both sides look to impose their will on how the future landscape will look.
It is undoubted that the lack of positive progress in the market will also have been greatly hampered by the widespread Coronavirus outbreak. As this continues to spread, markets around the world, particularly in Asia, have been in panic mode. With China being one of the dominant powers in world economic terms, this has certainly had a domino effect. With that said, plans to introduce a stimulus from the Chinese government have worked to steady the ship a certain amount.
Tough negotiations likely to take time
From their publicly stated positions, it would appear that UK PM Johnson, and EU Chief Negotiator Michel Barnier are still some distance apart in their view of how a Britain – EU relationship is going to look. In reality, these talks taking place over the next several months until December will hold the key in shaping the future landscape.
Boris Johnson though remains steadfast in his belief that the UK will not be following the rules of the EU when it comes to trade agreements and has proposed a “Canada style” free-trade agreement with the bloc. The EU on the other hand have referred to this as “ambitious”, and also commented on the need for a “level playing field”. All of this points to a difficult negotiation period ahead and possibly turbulent time for the GBP throughout, particularly if little compromise can be found.
Forex market somewhat bearish moving into the weekend
As we complete the first full Brexit week and move into the weekend, GBP/USD markets remain low. They have reached their lowest point of the year to date and lowest since Christmas Eve.
Traders will be hoping that Monday brings some more positive news on the geopolitical front, though that seems unlikely with the China virus crisis rumbling on and the UK seemingly in no mood to budge from its view on EU trade and relations moving forward.