Trading currencies on the Forex market is done in batches that are called "lots." When you open a Forex trading account you decide what size of lot you want to trade, with the main options being a standard, mini or micro lot. The amount of cash you keep in reserve plays a role in the lot size you can trade. Larger-sized lots produce profits at a faster rate than smaller lots; however, the losses can compound just as rapidly.
When trading on the Forex market, some of the terms will sound strange until you get used to how the market operates. Currencies are traded in pairs and will be referred to in three-letter abbreviations. For example, the pair GBP/USD trades the British pound against the U.S. dollar. In this case the GBP would be the "base" currency, and the USD would be the "counter" currency. The smallest movement in the value of the currency pair -- usually in the fourth decimal place -- is called a "pip." The actual value of a pip is determined by the size of the lot and the currency pair that is being traded. Currency pairs that do not involve the U.S. dollar have a variable pip value.
A standard lot is the largest lot in which currencies can be traded. Purchasing a standard lot of a currency pair means that you are purchasing 100,000 units of the base currency. When the U.S. dollar is the counter currency, each pip is valued at $10. Trading companies vary in the amount you are required to keep in your account as a reserve. When you are trading currencies, you are usually leveraging your account a significant amount. Forex market leverages range from 2 to 5 percent, compared to a 50 percent leverage in most stock market margin accounts.
A mini lot trades 10,000 units of the base currency of each currency pair you purchase. When you are trading a currency pair that includes the U.S. Dollar as the counter currency, each pip is valued at $1. Trading companies may only require a reserve balance of about $500 to open a mini account.
A micro lot is the smallest lot size that is traded on the Forex market. Each lot represents 1,000 units of the base currency. When you trade micro lots, the value of a pip in currency pairs that involve the U.S. dollar is 10 cents.
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