Trade Mechanics of Forex 02
Currency Lots
Currencies are traded in standard lot sizes to facilitate efficient trading on the forex market. The standard retail lot is 100,000 units of the base currency. Most currency dealers offer 10,000-unit mini lots and 1,000-unit micro lots. Some currency dealers offer a 100-unit nano lot. Positions can be sized larger by purchasing multiple lots. Fortunately, you don’t actually need $100,000 in your trading account to buy a single standard currency lot. Currency dealers offer various levels of leverage, allowing you to control full-sized lots with significantly less capital in your account. We discuss margin and leverage later in this title.
How a Currency Trade Works
The way a currency is simultaneously bought and sold during a trade is confusing for many new traders, so an example will help clarify what happens under the hood of a currency trade.
Assume for a minute that you are interested in buying the British pound against the U.S. dollar, which is listed as GBP/USD in your trading software. The base pair is the British pound; the quoted pair is the U.S. dollar. If the quoted exchange rate is $1.59 and you are trading one standard lot of currency, it will require 159,000 dollars to buy one British pound, or it will require selling 100,000 pounds to buy 159,000 dollars.
Since we are interested in buying the pound, we want the exchange rate to increase, allowing us to sell our pounds at a higher rate for more dollars than we sold to buy the original 100,000 pounds. As an
example, Table 1.5 illustrates how a currency trader realizes a profit or a loss using a single standard lot GBP/USD currency trade.
What Is a Pip? Long versus Short
Understanding Currency quotes of Forex
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Forex
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