Lots in Forex In trading, the term cottage is used to designate the size of a trade. The term’s origin is in the classic definition of “lot”, which refers to a set of similar and grouped units. However, “a lot” and “lottage” refer to different concepts, although closely related to each other:
While a lot refers to the number of standard units of an asset to be traded, a lottery relates to determining the number of lots that will make up the trade size on that asset. The number of assets defines the lot size, and the number of lots in work describes the lot.
It is prevalent that the key to trading success lies in knowing how to choose the moment to enter and exit the market. However, this is not true. Determining the size of a trade is probably the most important decision a trader has to face since it will determine the magnitude of his profit or, in the worst case, his loss. When carrying out the operation, it is more critical to decide on the size of each position. As explained later, market risk management comes into play in the said decision and the trader’s own account risk.
However, this is not true since determining the size of each position is much more critical since, as will be explained later, market risk management comes into play in the said decision and from the trader’s account.
The origin of the lots lies in the fact that the purchase or sale of a single unit of a particular asset in the market is not economically viable. Most likely, the cost incurred to carry out a transaction is greater than the profit made from a single unit of an asset. For this reason, traders use the preparation of a lot, which is a standard unit for trading, made up of a predetermined number of units of the asset with which they want to operate.
When trading with lots, traders have a standard contract and always know what number of units of the asset they are selling when they open a trading position. In addition, they try to have an amount that can benefit their investment. However, they also decide to take a greater risk, so everything will depend on the results obtained, which can vary and even be harmful.
Therefore, a lot can refer to the set of units of any asset or financial instrument traded in the markets—for example, a group of options, stocks or currencies.
In FOREX, one lot corresponds to a certain number of units of the base currency of a currency pair. If, for example, you are trading the EUR/USD pair, one lot will correspond to a certain number of EUR since the base currency is always the first when representing a currency pair. The second, in this case, the USD is called the counterparty currency.
These amounts express as a fraction of the standard Forex lot on the Meta Trader platform. On this platform, a mini-lot order will have a size of 0.1, since it represents one-tenth of a standard lot (0.1 = 10,000 / 100,000), and a micro-lot order will have a size of 0.01, since it is one hundredth of the standard lot (0.01 = 1,000 / 100,000).
The price of a lot in Forex will define by the currency pair’s price with which you want to operate. Therefore, it will give by the following formula:
For example, if a standard lot (100,000 units) of EUR/USD is purchase. And the price of the euro (base currency) is 1.5 USD (counter currency), the calculation will be as follows:
Once the amount of the lots and the minimum size of order in the foreign exchange markets have been define. The following point will analyze the optimal size of order in FOREX
As indicated in the first point. Lottery or determining the size of order in the foreign exchange market is one of the most critical decisions that every Forex trader has to face:
Regardless of how good a trader’s trading strategy is if the size of his orders is too large, the risk he will take will be equally too significant. On the other hand. If your position is too tiny, the bet will be minimal, and your profits will also be small.
In the first case, since there is a higher risk. A wrong calculation of the position size can severely impact the trader’s account.
The calculation of the optimal lottery will determine the number of lots, mini-lots or micro-lots that will make up the size of a Forex position. Depending on the market risk and the risk of the trader’s account.
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