Margin and Leverage
Lots and Position SizesIn Forex the minimum amount of currency you have to buy is called one "lot". That means that units of currencies are grouped and traded in lots. At a retail level, lots are divided into several categories: the so-called "full-size" or "standard" lots, "mini" lots, "micro" lots and "flexible" or "fractional" lots.
A standard lot consists of 100,000 units of whatever the base currency in the currency pair is. A mini lot consists of 10,000 units of the base currency and a micro lot 1,000 units of the base currency.
As you can see, a mini contract is one-tenth the size of a standard contract and the micro lot one-tenth of the mini lot.
Flexible lots, in turn, allow the trader to choose the exact amount of units of the base currency to buy or sell.
Differentiated by the lot sizes there are also several types of accounts that a trader can open with a retail broker-dealer. While a standard account controls 100,000 units per lot traded, a mini account and a micro account control one lot size lower respectively.
So for instance, when buying one micro lot on the GBP/USD, you would buy 1,000 British Pounds and sell an equivalent amount of US Dollars.
Let's suppose the current exchange rate for GBPUSD is 2.4500 and you want to buy 10,000 US Dollars worth of this pair. Here's the math:
For pairs with USD as the quote currency, take the Dollar amount you want to purchase and divide it by the exchange rate:
(desired position size) / (current rate) = # of units
that is:
10,000 US Dollars / 2.4500 = 4081.63 units of GBPUSD
As you can see, this is approximately 4 mini lots of British Pounds. If your broker-dealer doesn't offer fractional lot sizes you can always round up or down.
Buying a pair with USD as the base currency is much easier to calculate. Why? Because in these cases you just buy the amount of units you want because you are purchasing US Dollars, the base currency.
And in the case of a cross pair transaction, when buying 10,000 US Dollar worth of GBPCHF, for instance, we purchase 4081.63 units of GBPUSD at the above rate and sell 10,000 units of USDCHF.
Being able to choose among several lot sizes is a huge advantage retail Forex trading offers to the small investor. It allows you to tailor and fine tune your money management to better meet your trading style.
If you have a very small account size keep your risk profile low by choosing a dealer that offers micro or fractional lot sizes. Even many seasoned traders avoid standard contracts to be more precise in their position sizing. We will extensively talk about position sizing and money management in other units of the Learning Center.