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Quick Two-Minute Review: What's a Lot Again?

Sean Hyman (February 13, 2009)

By Sean Hyman Sometimes it helps to go back to the basics.

I often write about choosing stop-losses, reading charts, evaluating ATRs, risk management and more graduate-level trading techniques. But it’s Friday, so I’d like to give a little refresher course for my new readers.

If you’re just starting out in Forex trading, it helps to know the trading lingo. For instance: Lots. Many first time traders are confused about lots, so let’s review them quickly…

To understand lots, you first need to understand Forex trading accounts. There are two types of accounts in spot Forex. There are “standard accounts” (that trade in standard lots) and the more popular “mini accounts” (that trade mini lots).

A standard lot = 100,000 units of currency
A mini lot = 10,000 units of currency

What 100,000 Currency Units Looks Like in Trader’s Terms

So if I traded with a standard account and I bought one lot of EUR/USD, then I’d be buying 100,000 euros against the U.S. dollar. And I would be hoping that those euros went up in value vs. my dollars.

If I bought one standard lot of USD/JPY, I’d be buying 100,000 dollars against the Japanese yen. Either way, it’s 100,000 units, but I decide which 100,000 units I’m buying of which currency.

The Skinny on Mini-Lots

If I traded currencies with a mini account, and I bought one lot of EUR/USD, then I’d be buying 10,000 Euros against the U.S. dollar. Once again, I’d be hoping those euros rise in value against the buck.

If I were in a mini account and bought one lot of USD/JPY, then I’d be buying 10,000 U.S. dollars against the Japanese yen. So I’m buying 10,000 units of the U.S. dollar. It just depends on what pair I’m buying that determines what those units are denominated in.

In any case, you’re always buying the first currency listed in the pair. If I were selling short, I’d be selling the first one listed in the pair against the second one listed.

So just as I could buy 100 shares of IBM or 1,000 shares of IBM, I can buy different amounts of currency in “chunks” of 10,000 units each (in a mini account) or 100,000 units each (in a standard account).

Good Tip: It’s best for new traders to be in a mini account so they aren’t “forced” into buying larger chunks of currency. The mini account lets them chew on smaller bites at a time. It’s better for risk management purposes. This way you’re less apt to over leverage your account.

So, if I went from buying one mini lot to two mini lots, I’m going from buying 10,000 currency units to 20,000 currency units.

However, if I were in a standard account, going from one lot to two, I’d go from buying 100,000 units of currency all the way up to 200,000 units as the next incremental step. That’s one huge step – and shouldn’t be taken lightly.

Have a great weekend!

Sean

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.

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