Understanding FOREX Lots
To understand the Forex Market (currency), which dwarfs all the stock markets in the world, one must understand the concept of "lots." A traditional stock market trades in units of ownership called shares of stock. Its counterpart in the Forex market is known as a lot, which comes in standard, mini or micro sizes, each requiring a different amount of buying power to control. Understanding how lots work is not difficult but is essential to successful currency trading.
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Standard
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A standard lot is defined as 100,000 units of the base currency you are trading in. The lot size determines how much you will gain or lose as your trade unfolds. For example, a trader using the United States dollar as his base currency, holding a position with one standard lot, can expect that his trade will gain or lose $10 for each pip of movement. A pip stands for "point in percentage" and is the smallest unit of movement in the currency market.
Mini
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For decades, only large institutions like international banks and national governments used the Forex market, thus there was no need for any lot size other than standard. However, as the market opened to smaller traders, other options came into existence, such as the mini lot. A mini lot is 1/10th the size of a standard lot, allows the trader to control 10,000 units of his base currency and moves at the rate of $1 per pip. The mini lot allows traders with smaller bankrolls to participate in the market without over-leveraging themselves.
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Micro
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The micro lot is 1/100th of a standard lot and allows the trader to control 1,000 units of the base currency, with pips moving at 10 cents each. The most distinct advantage of the micro lot is that it allows new traders to get their feet wet without blowing their accounts out during the learning curve. Theoretically, you can't do too much damage to your personal finances if your pips are only moving at a dime apiece. Micro lots also allow seasoned traders to test new strategies under real market conditions.
Leverage
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The Forex market differs greatly from stock markets in the amount of leverage you are allowed to use. While seasoned stock traders are allowed to use margin to double their trading size (a 2:1 leverage ratio), anyone can enter the Forex market and immediately enter positions at a 400:1 leverage rate. This kind of leverage means you only have to have one quarter of one percent of actual funds to back up your market position. Gains and losses become greatly magnified.
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References
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