By: Charley Warady
There is nary a Forex trader who doesn't trade a leveraged account, and therefore trades in Forex lots. A lot is a quantity to be traded. That's really the definition in its simplest form. In commodities they use the term (although with livestock they use the term “cars” as in freight cars), and in stocks they use shares.
Don't get confused between Forex lots and pips. A pip is the increment of movement of a Forex pair. It has nothing to do with lots or lot size.
When a Forex trader talks about Forex lots, he's generally talking about a normal sized lot. Normal sized lots are traded with a sufficiently margined account. Even though the account is leveraged to a large degree, a Forex trader never wants to be in the situation that he doesn't have a cushion in his account. It is better to lower the size of the lots traded than to work against a short supply of margin. Admittedly, if you're making money on your next trade it doesn't matter how much is in your account, but you should always be prepared for the unlikely event of having a losing trade.
So, to give you an idea as to what Forex lots are all about, the normal lot is worth $100,000 in currency and when you trade a lot it is 1:100 leverage. What this means is that you are getting a loan from the broker to control $100,000 for your $1,000. As far as making (and possibly losing) money, if you have a standard account with 1:100 leverage, then for every 1 pip you gain there is $10 in profit for you.
To have this kind of trading activity, generally speaking Forex brokers will require a $10,000 initial deposit. Not everyone has that kind of money and still want to trade Forex. Forex brokers are not going to leave anyone behind. It used to be that only wealthy people, large financial institutions, and banks could trade foreign currencies. That's not the case anymore.
The mini lot may not only be for the under financed or the novice Forex trader. The experienced trader, trying out a new trading strategy may choose to decrease size of his Forex lots. That way you can get used to it without risking the kind of money you would using a normal lot.
Most brokers require at least one mini lot to be traded. The mini lot is worth $10,000 which means you are trading with 1:40 leverage. So, for every one pip in your favor you earn one dollar profit. This offers a great opportunity for new traders to find out what it's like with real trading, as opposed to trading in a demo account. With the risk being much lower, an important thing to consider it to always trade as if it is big money. One dollar doesn't seem like a lot of money, and many traders will be tempted to take unnecessary risks. Those dollars tend to add up and pretty soon you're talking about real money.
Some Forex brokers offer micro lot trading. It comes out to ten cents a pip, and if you only have a couple hundred dollars available and want to trade Forex, the micro is the form of Forex lots that would best suit your purpose. If successful, there's always time to graduate.
By: Charley Warady