One of the first concepts you need to understand as part of your Forex trading training are standard lots and micro lots; what are they and what’s the difference between them?
What is a Forex lot?
A standard forex lot is equal to 100,000 of the base currency so in the case of EUR/USD is EUR 100,000. The average pip size for a standard lot which is quoted to 4 decimal places is 10 of the counter currency, so in this case $10. If you are down 10 pips on a standard EUR/USD contract you have lost $100.
Pip Movements (e.g. EUR/USD @ 1.28205):
5th Decimal Place (Micro pip movement) = 100,000 (1 Lot) x 0.00001 = $1.00 P&L
4th Decimal Place (1 pip movement) = 100,000 (1 Lot) x 0.00010 = $10.00 P&L
3rd Decimal Place (10 pip movement) = 100,000 (1 Lot) x 0.00100 = $100.00 P&L
2nd Decimal Place (100 pip movement (Big Figure)) = 100,000 (1 Lot) x 0.01000 = $1,000.00 P&L
1st Deceimal Place (1,000 pip movement) = 100,000 (1 Lot) x 0.10000 = $10,000.00 P&L
Pip Movements (e.g. USD/JPY @ 76.850):
3rd Decimal Place (Micro pip movement) = 100,000 (1 Lot) x 00.001 = Y100
2nd Decimal Place (1 pip movement) = 100,000 (1 Lot) x 00.010 = Y1,000
1st Decimal Place (10 pip movement) = 100,000 (1 Lot) x 00.100 = Y10,000
Big Figure move = 100,000 (1 Lot) x 01.000 = Y100,000
Let’s take another example in the form of USD/JPY. The standard lot size is USD 100,000 as USD is the base currency. As USD/JPY is quoted only to 2 decimal places then a pip is equivalent to JPY 1,000 so if you are up 10 pips on a standard USD/JPY contract you have made JPY 10,000.
Standard lots in forex are usually for institutional sized accounts; we're talking big rollers, who should have $25,000 or more to make trades using standard lots.
What is a Forex lot?
So let’s get real, if you’re thinking of starting Forex Trading, you have to start small and work your way up. Micro lots are good for beginners who need to get to grips with Forex trading. Unlike standard forex lots, which are worth 100,000 of the base currency, a micro lot is the equivalent to 1,000 worth of the base currency you want to trade. Similarly, unlike standard lots, [where 1pip=10 of the counter currency on pairs quoted to 4 decimal places and 1pip=1,000 of pairs quoted to 2 decimal places] 1 of a pip in a micro lot is only worth 0.10 (4 decimals) or 10 (2 decimals) of the counter currency.
|Base Currency ||Counter Currency||Quoted Decimal Places||Standard Lot||Micro Lot||Standard Pip||Micro Pip|
|EUR||USD||4||EUR 100,000||EUR 1,000||USD 10||USD 0.1 (10 cents)|
|USD||JPY||2||USD 100,000||USD 1,000||JPY 1,000||JPY 10|