What exactly is a lot in forex trading? A complete guide to lot sizes and leverage

Basic Concept of a Lot

In the foreign exchange market, a “lot” is the basic unit of measuring trading size, representing a standardized trading contract. Simply put, a lot is the number of units you trade when placing an order, determining how much currency you are buying or selling.

1 standard lot = 100,000 units of the base currency

What does this mean? If you are trading the EUR/USD currency pair, trading 1 standard lot is equivalent to buying or selling 100,000 euros. The same logic applies to all other currency pairs.

The Relationship Between Pips Movement and Profit/Loss

The smallest price unit in the forex market is called a “pip.” Because currency pair fluctuations are extremely small, traders need to trade large amounts to achieve significant profits or losses.

Key data comparison:

• When trading 1 standard lot, a 1 pip price change results in a profit or loss of $10
• For EUR/USD: from 1.38869 to 1.38879 (up 1 pip), the account increases by $10

This ratio varies with different lot sizes and currency pairs. Here are some real examples:

Derivative Units of a Lot: Mini and Micro Lots

Since forex trading requires significant capital, trading platforms usually offer flexible lot options to allow small and medium investors to participate. This has led to the concepts of mini lots and micro lots.

Conversion relationships among the three:

• 1 micro lot = 0.1 mini lot = 0.01 standard lot
• 1 micro lot represents 10,000 units of the base currency
• 1 mini lot represents 10,000 units of the base currency

For novice traders with limited funds, choosing to trade micro or mini lots is a more practical approach. Some forex margin brokers offer leverage up to 200x, supporting trades as small as 0.01 lot (micro lot level), greatly lowering the entry barrier.

Forex Leverage: How to Use Small Money to Control Large Trades

After understanding what a lot is, the next step is to understand leverage. Leverage is a core feature of forex trading and a main reason attracting retail traders.

The Basic Principle of Leverage

Imagine walking into a bank that is willing to lend you $100,000 for forex trading, on the condition that you deposit $1,000 as collateral. It sounds incredible, but this is how leveraged trading works.

The multiple of leverage you can use depends on your broker. Once you deposit margin with your broker, you gain the right to trade with larger funds.

Margin and Risk Management

Suppose your broker offers a 100:1 leverage ratio (corresponding to a 1% margin requirement). You want to control a position of $100,000, but only have $5,000 in your account. At this point, you only need to deposit an additional $1,000 as margin to control this $100,000 position.

It’s important to clarify that this $1,000 is not a trading fee, but a risk collateral. Its purpose is to protect the broker—if your account incurs losses, the margin acts as a buffer. When losses reach a certain level (usually equal to the margin amount), the broker will automatically close your position to prevent further risk.

This is why leverage is a double-edged sword: it can amplify gains but also magnify losses.

Mastering the concept of a lot, flexible lot combinations, and the risk principles of leverage enables more rational participation in forex trading.