The world of currency trading is full of its own distinctive terms and concepts. Understanding these terminologies is very essential in avoiding some pitfalls faced by newbie traders.
In Forex trading, lot is the standard transaction size of all transactions. The standard size for a lot is 100,000 units. And, there is
also sizes for mini lot (10,000 units), micro lot (1,000 units), and nano lot (100 units). Because trading using these units can make trading to be exorbitant for the average trader, Forex brokers have come up with a concept referred to as leverage.
Leverage enables you to execute large trades in your trading platform with a limited capital in your account. Leverage is a great moneymaking tool that many people have used to harvest huge profits in Forex trading. However, you should use it carefully because it can either work against you or for you. In other words, it is a double-edged sword.
If your broker provides 100:1 leverage, then you require 1 unit of currency to take charge of 100 units in the market. Therefore, it would only require 100 units to take charge of 1 mini lot (10,000 units) in the market, or 1,000 units to take charge of 1 standard lot (100,000 units). If your broker provides a 200:1 leverage, then you require 50 units to take charge of 1 mini lot, and 500 units to take charge of 1 standard lot.
Thus, profits in the business of currency trading is a factor of leverage x the type of lot being traded x the smallest price movement in the value of a currency pair (pip). On the other hand, loss is determined using the same method when price goes against you. Pip is normally the right-most digit of any quote of a currency pair, and it is what either increases or decreases when you enter a trade.
For example, if you buy EUR/USD at 1.2800 and the price moves to 1.2805, your profit will be:
$50 (for standard lot) = 100,000 x 0.0005
$5 (for mini lot) = 10,000 x 0.0005
$0.50 (for micro lot) = 1,000 x 0.0005
$0.05 (for nano lot) = 100 x 0.0005
Therefore, proper understanding of lots, leverage, and profits is important if you want to succeed in the business of Forex trading. Otherwise, if you don’t have a
solid grasp of these terminologies, you may lose a lot of money when trading Forex.
