Liquidity

Liquidity: An asset’s availability. High liquidity indicates a high number of offers and bids. Illiquidity indicates a low number.

All About Lots

Lot Sizes - text

Historically, currencies were traded in specific amounts called lots. The standard size for a lot is 100,000 units. There are also mini-lots of 10,000 and micro-lots of 1,000.

To take advantage of relatively small moves in the exchange rates of currency, we need to trade large amounts in order to see any significant profit (or loss). As we have already discussed currency movements are measured in pips and depending on our lot size a pip movement will have a different monetary value.

For example we chose to BUY a mini-lot of 10,000 units of the EURUSD.

So what we are effectively doing is buying €10,000 worth of US Dollars at the exchange rate 1.35917. We are looking for the exchange rate to rise (i.e. the Euro to strengthen against the US Dollar) so we can close out our position for a profit.

So let’s say the exchange rate moves from 1.35917 to 1.36917 –the exchange rate rose by 1c ($). This is the equivalent of 100 pips.

So with a lot size 10,000, each pip movement is $1.00 profit or loss to us (10,000* 0.0001 = $1.00).

As it moved upwards by 100 pips we made a profit of $100.

For example’s sake, if we opened a lot size for 100,000 units we would have made a profit of $1,000.

Therefore lot sizes are crucial in determining how much of a profit (or loss) we make on the exchange rate movements of currency pairs.

We do not have to restrict ourselves to the historical specific amounts of standard, mini and micro. We can enter any amount we wish greater than 1,000 units. 1,000 units is the minimum position size we can open.