If you have taken your first steps in the foreign exchange market and you have fully understood what is a forex lot and how it works the next thing to know are the basic terms used in this market.
In this article, we will explain in a simple way what is a lot, the types that exist and how they are calculated.
What is batch simple explanation
When buying and selling any goods or products, all parties involved (buyer and seller) must use the same Units of measurement.
Examples of different units of measurement include kilograms, tens, meters, hands, mini hands, etc.
All market participants use units of measurement that always represent the same quantity, the same weight, or the same volume at any place or time.
Lot is the unit of measurement used when we talk about the Forex market.
A lot represents a standardized unit for buying and selling in the foreign exchange market. In other words, people who participate in this market do so by trading any amount of currency they choose. The term “lot” means 100,000 units of the selected currency or currency symbol or currency.
Let’s look at an example of the US dollar (USD) and the euro (EUR), since they are the most exchanged currencies:
- 10 lots of USD are equivalent to 1,000,000.00 USD because each lot consists of 100,000 units of the selected currency 10 lots of USD = 10 x 100,000 = 1 million.
- 2 lots of Euros equals 200,000 Euros. 2 lots of EUR = 2 x 100,000 = 200,000 EUR
What is batch for?
Transactions in the foreign exchange market are carried out by buying and selling a certain number of hands
For example: We buy 3 lots of USD/EUR which is equivalent to buying 300,000 USD.
Therefore, the amount we buy or sell will define Our scale of operation.
The size of the operation is crucial when trading because it determines Risks in our business: How much we lose if the price moves against us. It will also tell us how much we will gain if it goes in our favor, so we will determine the risk/reward of the trade.
Forex lot type
In Forex, a lot always refers to 100,000 units of a currency or currency, just as a dozen always refers to 12 units
However, to make it easier for more people to participate in the market, brokers offer the possibility to invest or exchange smaller amounts per lot. Get smaller quantities by breaking a lot into smaller parts:
- Mini hands: Represents a tenth or 10% of a lot, corresponding to 10,000 units of coin.
- miniature hands: Represents 1% of the lot size, corresponding to 1,000 units of coins.
- Nano batch: it is specially offered by some brokers and can correspond to 100 or even 10 currency units, depending on the investment platform used.
How to Calculate Forex Lot
When investing in foreign exchange, we must understand two basic characteristics in advance:
- First, the currency pair we want to invest in
- Second, the number of lots we’re going to acquire, expressed in terms of the amount the buyer is going to be risking. Remember that the lot size directly determines the profitability of an open position.
To facilitate the calculation of lot sizes suitable for investment strategies, brokers and some websites provide calculators.
Its operation is simple: we introduce the requested variable, we give it calculations: as a result we will get the lot size to buy or sell according to our trading plan and the provided data.
The data to be entered is:
currency pair. Allows you to choose the currency pair to invest in. Remember that the first currency or base currency is the currency you buy in and the second currency is the currency you pay in.
Account currency. The currency of our account is usually EUR or USD.
account size. The total balance of funds in our account available for investment or trading.
Risk Ratio %. The level or percentage of risk we take on a trade will determine what percentage of your account balance you are willing to invest.
stop point. If the market moves against us, when will we close the operation? Loss or gain is always measured in pips contract size. The minimum investment size is usually one lot or 100,000 units.
Related post – Forex – What does Forex mean? (definition of forex)
summarize
- Currencies or currencies are exchanged or traded in units called lots.
- A lot is a unit of measurement used to buy and sell currencies in the foreign exchange market.
- Lot size always refers to 100,000 units of the selected currency or currencies.
- Smaller units obtained by dividing the batch by 10, 100, or 1000 can be used. They are called mini-hands, micro-hands and nano-hands, respectively.
- There are lot calculators that make it easy to figure out how much we should buy according to a certain investment strategy, or according to how much money you want to risk.