With more than a trillion dollars in daily volume, the Forex market dwarfs the stock exchanges of the world in size and scope. To be successful in Forex, it is crucial to understand quoting conventions and unit sizes, like full lots.
History
The framework for today's foreign exchange system goes back to the 1944 Breton Woods agreement. This created a new system of global monetary exchange between governments, corporations, and banks.
Definition
In most cases, a full-sized currency lot is an instrument representing 100,000 units of currency. One lot of Euro/U.S. dollar currency represents $100,000, two lots represent $200,000, and so forth.
Currency Units
Inter-bank currency exchanges are often conducted at the spot price, and in standard, un-leveraged unit sizes. For example, if $1 billion were swapped for 600 million pounds, the exchange would represent exactly those values. In Forex trading, however, considerable leverage is employed. This leads brokers to seek ways to standardize and simplify unit sizes for their clients.
Leverage
Most retail Forex brokers provide anywhere from 50:1 to 200:1 leverage, meaning that for every actual dollar wagered on a trade, between $50 and $200 is borrowed. For a client with 100:1 margin, the actual cost of purchasing one lot controlling $100,000 is only $1,000.
Other
Forex brokers have developed a variety of derivatives of the standard full-sized lot. The most popular are mini-lots, which are a tenth the size of full lots---or 10,000 units. Some brokers have gone even further, offering micro-lots, which are a hundredth the size of full lots, or 1,000 units.
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