What Is The Difference Between A Macro And Standard Lot?

What Is The Difference Between A Macro And Standard LotNew traders in the foreign exchange currency market (FOREX) often experience some confusion while trying to assimilate all the new concepts involved in trading, such as the ability to essentially borrow currency and sell, or short it, when they don’t actually own the currency.

  • Another area of currency trading that frequently requires clarification involves the specialized terminology of the Forex markets.
  • One term that needs to be looked at concerns the different number of currency units that makes up a trading lot.
  • The smallest possible quantity of a currency is referred to as a unit.
  • For example, one unit of the United States dollar (USD) equals one dollar. One unit of the euro equals one euro and one unit of the yen equals one yen.
  • Some Forex brokers will permit traders to undertake currency transactions for as little as one unit. Others have various minimum trade sizes that form the different sizes of trading lots.

 
One of these is the macro lot, consisting of 100 units of the base currency of a currency pair. Next comes the micro lot, which is equivalent to 1000 units of the base currency, followed by the mini lot, 10,000 units. Finally, comes the standard lot, equal to 100,000 units of the base currency.

One enjoyable feature of these various lot sizes is that since they are all powers of 10, the mathematical calculations regarding risk levels and profit potential quickly become very intuitive to the trader. There are none of the bizarre fractions, such as 32nds and 64ths, such as there are with stocks, bonds and interest rate futures that make these calculations so vexing. About the only math skill required, is the ability to place a decimal point in the proper place.

  • Forex broker trading platforms make it even simpler by performing this function automatically.
  • With these simple guidelines in mind, let’s compare how trading a macro lot versus a standard lot will affect the monetary value of a Forex transaction.
  • Since it is the most widely traded currency pair in the Forex market, we will use the EUR/USD for illustration purposes.

If a trader thinks that the value of the euro relative to the dollar will increase, he will give his broker instructions to buy the pair. If he is trading a macro lot, his broker will purchase €100 (100 units) for the trader while simultaneously selling $100. For every pip, the smallest amount by which a currency’s value can change, that the euro gains against the dollar, the trader will make a profit of $.01.

This is where the elegant simplicity of the math of Forex trading will become perfectly evident. If instead of a macro lot, the trader gave instructions to his broker to purchase a standard lot, each pip of profit would equal $10 dollars. Of course, the exact opposite would be true if the trader was wrong and instead of profits, realized a loss.

The simple profit and loss calculations of Forex trading frees up a lot of mental energy that can be devoted to forecasting prices.

For more information about how trade size affects profit and loss levels, contact LucrorFX or OPEN A FREE FOREX DEMO ACCOUNT today!

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