The word “lot” has shifted from being a biblical name through its traditional meaning of one’s destiny to today’s synonym for “many”. Today it is the basic unit for forex trading contracts
The word “lot” has shifted from being a biblical name through its traditional meaning of one’s destiny to today’s synonym for “many”. In Medieval times casting lots was a tool to determine destiny which entailed selecting the shortest or longest from a bunch of straws or other otherwise identical items. These bunches eventually became piles, which became a measurement unit that differs from one asset to another.
In forex, contract sizes are measured in lots (piles of money) of 100,000 currency units, worth 100,000 units of base currency.
With the EURUSD, for example, one hundred units of the currency pair will equal 100,000 Euros. Its value equals the amount of COUNTER currency per base currency times 100,000. If the exchange rate is 1,1073 US dollars to the Euro, one lot of EURUSD will equal 110,730 US dollars. Where the value of the pair increases one pip from 1.1073 to 1.1074, one lot of Euro-USD will have therefore gained 1 pip (1/10,000th of a US dollar) times 100,000 units equals $10.
Lots of Leverage
Since most retail traders cannot afford to risk a hundred thousand dollars on a single position, most platforms also enable opening forex positions of a mini-lot or micro-lot – 10,000 and 1,000 units respectively. Although equal to the hefty sum of 10,000 and 1,000 Euros (again – respectively), with 20:1 leverage this would only entail a 500 or 50 Euro initial investment – much more affordable for the average retail trader.
With other assets, traders also measure contract sizes in lots.
In shares, one Round lot equals 100 shares. Anything above or below than that is an Odd lot. Thus, 236 shares constitute a mixed lot – 2 round lots and a 36-unit odd lot. A lot of government bonds equals a million dollars’ worth. On the municipal bonds level, a lot equals a hundred thousand dollars. And in commodities, grains are measured in 5,000 bushel lots of wheat, corn, wheat or soybeans.
Once again, leverage here is important, since with oil, for example, the price of one lot, or 1,000 barrels at $60 a barrel would equal $60,000. For retail traders, a mini lot of 100 barrels is available, which would equal $6,000. And at 10:1 leverage a $600 required margin is still affordable.
Before opening a position, examine the lot size you are trading and don’t overextend yourself. In most online platforms, the contract size and required margin will be prominently displayed. And do not forget that your profit and loss will be determined by the leverage value of your position size, not by your initial investment. Keep a close eye on your free margin and don’t let it fall below your used margin in order to prevent a margin call. Always maintain sufficient funds in your account.