A lot is one of the basic terms in forex trading and essential tools to make profits. It’s essentially the amount or quantity that is being traded in the market. To fully utilize the lot size in your favor, it’s important to understand how it works and how much it can affect the result of the overall trading activity.
What’s the Lot?
The lot in forex trading is the size of a trade, the amount of currency being traded. It is basically the standardized unit of measuring the quantity of the trade.
The lot is generally associated with the Pip, which represents the smallest changes in exchange rates, and is typically used in calculating profits and losses in forex trading.
Types of Forex Lots
There are four common types of lots in Forex trading; Standard, Mini, Micro and Nano.
|Lot Size||Units||Volume||Value in $|
1. Standard (1.0):
One standard lot is equal to 100,000 units of the currency you are trading. Meaning that if you are opening a trade with a lot size of 1.0, then you are buying/selling 100,00 units of the traded currency. Using the standard lot size makes every pip worth $10.
For example, if you open a long trade on the EUR/USD currency pair with 1 standard lot size, then you bought 100,000 units of the Euro. When you buy at 1.1250 and the exchange rate rises 20 pips to 1.1270, the trade’s profit is $200 (Lot size x Pips).
2. Mini (0.10):
One mini lot is equal to 10,000 units of the currency you are trading. So, if you are opening a trade with a lot size of 0.10, then you are buying/selling 10,000 units of the traded currency. Basically, the mini lot size makes every pip worth $1.
A mini lot is 10% of the standard lot.
Let’s say we are selling the GBP/USD pair with 1 mini lot size; it means selling 10,000 units of the pound. If the price at selling time was 1.2030 and the pair fell 50 points to 1.1980, then the profit will be $50.
3. Micro (0.01):
One micro-lot is equal to 1000 units of the currency you are trading. Trading with a lot size of 0.01, means that you are buying/selling 1000 units of the traded currency. With the mini lot size every pip is worth $0.10.
A micro lot is 1% of the standard lot.
For instance, buying the pair USD/JPY with 1 micro lot size; it means buying 1000 units of the dollar. Let’s assume that the price at selling time was 113.40 and the pair rose 40 points to 113.80, then the profit will be $4.
4. Nano (0.001):
One nano lot is equal to 100 units of the currency you are trading. Opening trade with a lot size of 0.001, means that you are buying/selling 100 units of the traded currency. Using the nano lot size makes every pip worth $0.01.
A nano lot is 0.1% of the standard lot.
For example, if you open a long trade on the USD/CHF currency pair with 1 nano lot size, then you bought 100 units of the dollar. If you buy at 0.9060 and the exchange rate rose 40 pips to 0.9100, the trade’s profit is $0.40.
Nano lot sizes are only offered by a few brokers. It’s considered to be very useful for beginner traders who want to start live trading with very small initial investment capital.
Why does Lot Size matter?
Determining the proper lot size plays an important role in your risk management plan. This will depend on your risk tolerance and account size. Calculating how much money you are putting at risk per trade heavily relies on the lot size. For example, using large lots on small accounts may cause money loss.
Read also: 10 Steps to Manage Trading Risks Effectively
How to Choose the Proper Lot Size?
Calculating lot size will require your trading account balance and risk percentage per trade, depending of course on the total account balance. A proper risk percentage per trade is commonly up to 3% maximum. So, if your trading account has $1000 balance, the ideal risk rate is 30 pips. In this case, using a mini lot (0.10) will be appropriate. Let’s elaborate:
3% of $1000 is equal to $30. If you choose the mini lot size, you will be risking only 3% of your account, as 30 pips will be worth $30.
Pip Value per Lot Size
To calculate the pip value according to the lot size, simply divide the pip value 0.0001 (or 0.01 in yen-based pairs) by the current exchange rate. The result here is the value of the pip in terms of the traded currency. Multiplying this value by the lot size (100.000, 10.000, 1.000, 100) and you will get the exact value of the pip according to the lot size you’re using.
For example, trading the USD/JPY at 118.20 with a standard lot size means that the pip is equal to (0.01 / 118.20) x 100,000 = $8.46.
How can I start Forex Trading?
A good way to start trading forex is by educating yourself about the basics of the market. Check our detailed guide for beginners to Learn Forex trading. After getting a sufficient forex education and being comfortable with the basics, you can choose to trade directly on a live forex account or open a demo account to safely explore the market.
In financial markets, learning the basics of fundamental analysis is the key to predict the market movements and setting the strategy for your investment. The main benefit of fundamental analysis is to determine the key factors which affect the currency pairs or gold and other financial instruments.
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