A lot is the standard unit used to measure trade volume in financial markets. In Forex, one standard lot represents 100,000 units of the base currency in a pair.
For example, trading one lot of EUR/USD means dealing with 100,000 euros, while one lot of USD/JPY equals 100,000 US dollars.
Online trading platforms also allow traders to use smaller position sizes. A standard lot equals 100,000 units, a mini lot represents 10,000 units, and a micro lot represents 1,000 units.
For other asset classes, a lot refers to a fixed contract size specific to that instrument. For example, one lot of gold typically equals 100 ounces.
The chosen lot size directly affects pip or tick value and therefore potential profit and loss.
Leverage increases a trader’s purchasing power by allowing them to control a position that is larger than their actual capital.
This can amplify potential returns, even though the initial investment is relatively small.
However, leverage must be used with caution. If applied improperly, it can lead to rapid losses and even the loss of all available equity.
For this reason, leverage is considered a double-edged tool and should be used carefully.
Leverage is often described as using borrowed money, but this is not entirely accurate. Brokers do not add funds to your account.
Instead, leverage reduces the amount of capital required to open a position by a certain ratio.
For example, opening one lot of EUR/USD with no leverage requires €100,000. With leverage of 1:10, only €10,000 is required.
Higher leverage reduces the required capital even further.
Lots define trade size, while leverage increases buying power. One standard Forex lot equals 100,000 units of the base currency.
Higher leverage increases risk, which is why it should always be used carefully and with a clear understanding of its impact.
