Forex markets are home to traders from all over the world. In addition to Retail traders, the Forex market attracts institutional traders, commercial banks, hedge funds, pension funds, governments and central banks, commercial companies and many others. Each participant trades different trade sizes to exchange currencies. Forex participants use lots as a measurement of currency units when they are trading.
Large institutions exchange hundreds of millions in foreign currency every day. In order to do this, they trade thousands of standard lots that may be inaccessible to retail traders due to their size.
Standard lot definition
In forex trading, a standard lot refers to 100,000 units of a base currency. Which is the largest size that you can find.
Why is it important for traders to understand the standard lot?
- There are four distinct lot sizes in forex – standard, mini, micro, and nano
- Understanding lot sizes in trading helps traders better plan their trades and take well measured risks
- Learning about lot sizes is useful for calculating Stop Loss and Take Profit sizes.
- Buying a single standard lot means buying 100,000 units of the base currency of the pair
Standard lot explained in more detail
Just like we use 100 USD, 50 USD, 20 USD and other banknotes in our day-to-day lives, Forex traders use Standard, Mini, Micro and Nano lots to place trades. Standard lot is the largest unit and it equals 100,000 units of a base currency.
Every currency pair consists of two parts: base and quote currency. Base currency is the first one in any given pair. Quote currency is the second one. When a trader purchases 1 Standard lot of EUR/USD, it means that the trader has purchased 100,000 Euros against the US Dollar. Similarly, when a trader sells 1 standard lot of EUR/USD, the trader sells 100,000 Euros against the US Dollar. Lots are nothing more than measuring units.
Standard lot example in forex trading
To get a better understanding of standard lots, let’s look at an example. Let’s say a trader is predicting the price of EUR/USD to increase by 100 pips (In EUR/USD 1 pip = 0.0001) and places an order. Order size is 10 pips, which is 10X100,000 Euros. As we have already mentioned, 1 standard lot equals 100,000 of a base currency. If the price goes towards the predicted direction and makes 100 pips in profits, the trader will make 10,000 Euros in profit.
Main takeaways from the standard lot in forex
- Forex lots are divided into four sizes – standard, mini, micro, and nano
- A standard lot is the largest trading unit and equals 100,000 units of the base currency
- When a trader buys or sells a standard lot, he/she buys or sells 100,000 units of the base currency
FAQs on the standard lot in forex trading
How much is a standard lot in forex?
A standard lot is a lot size that is equal to 100,000 units of the base currency of any given pair. When a trader buys a standard lot, he/she buys 100,000 units of base currency against the quote currency.
What does lot size mean in forex trading?
A lot is the size of a single position traded in a currency pair. The trader buys the base currency against the quote currency. There are four distinct lot sizes in forex – standard (100,000 units), mini (10,000 units), micro (1,000 units) and nano (100 units).