A lot is the minimum number of currency units in a single trade. The standard lot in most Forex futures is 100,000 units of foreign currency, like the euro, Swiss franc, Australian dollar, or Canadian dollar (£62,500 in the pound and ¥100,000 in the yen). The standard lot in professional interbank Forex trading is generally $5 million. If a trader wants to do less, he specifies “small” or the amount when asking for a bid/offer, and if he wants to do more, he will say “size.”
The standard lot for spot retail trading is 100,000 units of foreign currency, but the number of contract specifications has risen in recent years. The retail spot market began to expand only when the mini lot was introduced (10,000 units). A little later, the micro lot was introduced — a mere 1,000 units! The micro lot in the EUR/USD, for example, at €1,000 or $1,350 when the exchange rate is 1.3500, could be traded for as little as $135 in initial margin if the leverage ratio was 1:10.
Critics of the spot Forex market complain that the combination of micro lots and leverage was seducing the public into trading a security they did not understand just because it was the only choice available for a trader with a very small capital stake. This is overall true. You do not see micro lots in oil, corn, or equities, although technically, you could buy 10 shares of a stock priced at $13.50 with no leverage. Bigger equity players can get a 50% margin from the brokerage houses, but if all you have to trade with is a capital stake of $135, the broker is not offering you leverage.
In the USA, regulations constrain leverage to a maximum of 1:50. Brokers in other countries can offer leverage of as much as 1:500, 1:1000, or even 1:2000, meaning that if you have $135, you could trade a face value of $67,500-worth of foreign currency units or more.
Some brokers offer something called a nano account, where the lot size is 100 units of foreign currency, say €100 or £100. The nano lot is also called the 0.001 lot. There are companies that do not restrict the size of a trade at all and offer position sizing down to a single currency unit (0.00001 lot).
Some people confuse mini lots with micro lots and micro lots with nano lots, but each one is 10 times smaller than the next:
- Standard lot: 100,000 units of foreign currency
- Mini lot: 10,000 units
- Micro lot: 1000 units
- Nano lot: 100 units
In EUR/USD, a one-pip move results in the following gain/loss:
- Standard lot: 0.0001 x 100,000 = $10.00
- Mini lot: 0.0001 x 10,000 = $1.00
- Micro lot: 0.0001 x 1,000 = $0.10
- Nano lot: 0.0001 x 100 = $0.01
Since we have four pips plus fractional pips after the decimal point in the price quote, the nano lot is probably a logical development. The promotional idea is that the beginner can learn to trade while risking only pennies, but again, a nano lot is designed to appeal to persons with very low capital stakes. The conventional assumption is that anyone not willing or able to save up enough capital to manage a decent-sized account is not smart enough or capable enough to trade well and manage the vast leverage in Forex, but we do not have reports that nano account holders go broke at a faster pace than traders of any other lot size.
Restrictions on Availability
Each broker will differ as to what currencies you can trade using a lot size other than the standard or mini. If you wanted to trade the Indonesian rupiah against the Turkish lira, your broker would probably decline such a trade in the micro or nano lot size. However, for the cross-rates where there is sizeable volume, such as EUR/GBP or EUR/CHF, you may be able to trade in any lot size.