Pound dips after BoE hike to 4% as dollar firms: what lot size means

The dollar's post-election slide paused on Thursday, and the pound slipped even as the Bank of England raised interest rates. The Bank of England lifted Bank Rate to 4%, and Investing.com reports the pound was flat after the 25 basis point hike while the dollar steadied before US payrolls data.

The official ECB reference rates show the shift. GBP/USD's fixing for 5 November was 1.3459, down 0.30% from 1.3500 on 4 November. EUR/USD's fixing fell 0.38% to 1.1224. According to investingLive, US initial jobless claims fell to 189,000 against a 196,000 estimate, a sign of a firm job market. Investing.com reports the dollar edged up as oil prices bounced, with payrolls in view. investingLive noted before the decision that the hike was widely expected and marks the first in the current tightening cycle. Our sister site has more on the BoE decision and the steadier dollar.

What is lot size?

A lot is the unit traders use to say how big a forex trade is. It counts units of the base currency, the first currency in a pair. In GBP/USD, the base is the pound.

There are three common sizes:

• Standard lot: 100,000 units of the base currency
• Mini lot: 10,000 units
• Micro lot: 1,000 units

The price move is the same for everyone. The lot size decides how much money that move is worth to you. A bigger lot means bigger gains or losses from the same move.

A worked example

We use the two GBP/USD fixings. These are once-a-day reference rates, not prices you could trade at, but they show the arithmetic clearly.

Step 1: measure the move in pips. A pip is the fourth decimal place in GBP/USD, or 0.0001.

• 1.3500 - 1.3459 = 0.0041
• 0.0041 / 0.0001 = 41 pips

Step 2: find the value of one pip for each lot size. Multiply the lot size by 0.0001. The answer is in US dollars, the quote currency (the second currency in the pair).

Step 3: check it another way. 100,000 pounds was worth 100,000 x 1.3500 = $135,000 at the 4 November fixing. At 1.3459 it was worth 100,000 x 1.3459 = $134,590. The difference is $410, which matches the table.

So a trader who held one standard lot of pounds through this move would be $410 worse off. A trader holding one micro lot would be $4.10 worse off. Same chart, very different outcomes. You can follow the pair on a GBP/USD chart.

Why it matters for new traders

Lot size is the main dial that controls risk. On days with big news, such as a central bank decision or US jobs data, prices can move more than usual. A move that costs a few dollars on a micro lot can cost hundreds on a standard lot.

Many brokers let you trade with leverage, which means borrowing to control a position larger than your deposit. Leverage makes it easy to open a standard lot with a small account. The lot size, not your deposit, sets how much each pip is worth.

Today also shows that headlines and prices do not always line up. The BoE raised rates, yet the pound's fixing fell, because a firmer dollar weighed on the pair. Knowing what each pip is worth helps you judge what any move means in money terms, whatever the cause.

Key terms

• Lot: a standard unit of trade size, counted in the base currency.
• Standard, mini, micro lot: 100,000, 10,000 and 1,000 units.
• Pip: the smallest usual price step, 0.0001 in GBP/USD.
• Pip value: lot size x 0.0001, paid in the quote currency.
• Bank Rate: the Bank of England's main interest rate, now 4%.
• Reference rate (fixing): an official once-a-day rate published by the ECB, not a live quote.