Forex is commonly traded in specific amounts called Lot Sizes, also referred to as Position Sizes, which are simply the number of currency units you want to buy or sell. Like buying 1kg of butter, or a dozen eggs from your local supermarket, anything you buy or sell is determined by a unit of measurement. Just like gold is traded in Kg. or Ounces, and oil in barrels. Trading a single unit of a currency pair isn’t viable; this is where Lots come in. To trade currency pairs, you need to understand the concept of a Lot in Currency Trading. To define it simply, a Lot is a unit measuring a transaction amount.
In several of our blog posts, including our most recent, Currency Trading and its 7 Pairs, we make mention of Pips, which refers to the change in the value of one currency in relation to another. A pip is usually the 4th decimal place, and therefore a very minute measure. – To be able to benefit significantly from these minute changes in the value of currencies, you need to trade relatively large amounts of a particular currency pair. Pips enable you to trade these very tiny movements in relatively large volumes referred to as Lots.
On your Trading Platform, when you place a Buy or Sell order, these orders are placed in Lot sizes. In Forex Trading, Lots are subdivided into 4: Standard, Mini, Micro, and even Nano Lot sizes. A Standard Lot translates into 100,000 units of a currency; a Mini Lot, 10,000 units; a Micro Lot, 1,000 units; and a Nano Lot, 100 units. (Each being a 10th of the former). Some brokers show the currency quantity in Lots, while others show them in the actual currency units. This is intended to give you more control over your risk exposure. So for example, you could choose to buy 100,000 Lots of base currency GBP/USD- That is a standard Lot. Or you could buy a Micro Lot of 1,000 GBP.
|LOT SIZE||NUMBER OF UNITS|
Lot Size Forex Calculator
- Calculate Your Risk: It is necessary to calculate your risk in terms of percentages before you can establish the right Lot size to use. Normally, it is suggested that traders adopt the 1 percent rule. This means that in the event that a trade is closed out at a loss, no more than one percent of your overall account balance should be at risk.
- Set A Stop Loss: With any open position, a Stop Loss should be established to indicate the point at which a trader desires to quit a trade in the event that the market doesn’t move in their favor.
There are nearly limitless ways Stops can be put. When placing orders, traders would typically use major lines of Support and Resistance as guiding lines. You can use Price Action, Pivots, Fibonacci Ratios, and other approaches to determine these values.
Calculate The Pip Cost: It is necessary to calculate the pip cost for your trade as the final step in choosing a Lot size.
The cost of a pip is the amount of money you will gain or lose for each pip. As the size of your Lot grows, so does the value of your pip. On the other hand, if you trade with a smaller Lot size, your profit or loss per pip will be reduced as well.
The EUR/USD Pair Will Be Used in Our Example Below:
For context, if you buy EUR/USD, you’re speculating, per your analysis, that the Euro will strengthen against the dollar. If the price quoted is 1.3000, this means you’ll exchange €1 for $1.3000. To put it differently, you’ll need $1.3000 to buy €1.
So, if you wanted to trade standard Lots, this means that at the current price, you’ll need 130,000 units of the quote currency (USD) to buy 100,000 units of the base currency (EUR).
A Mini Lot size is one-tenth the size of a Standard Lot, meaning that a Mini Lot is worth 10,000 units of currency in forex trading. The size of a Mini Lot also means both the profit and loss effects are lower than with standard Lots. In our EUR/USD exchange rate of 1.3000, one Mini Lot of the base currency (EUR), will be 13,000 units. Meaning you’ll need 13,000 units of the quote currency (USD) to buy 10,000 units of EUR.
A Micro Lot size is one-tenth the size of a Mini Lot, which is 1,000 units of currency. Pip movements result in cash swings of 1 currency unit, e.g., €1. Again, in our EUR/USD example of 1.3000, a Micro Lot will be 1,300 units; meaning you’ll need 1,300 units of the quote currency (USD) to buy 1,000 units of EUR. Micro Lots also require less leverage, so a swing won’t have as much of a financial impact as compared to larger Lot sizes.
A Nano Lot size is, you guessed it- one-tenth the size of a Micro Lot, which is equal to 100 units of currency. In effect, 1 Nano Lot of the base currency EUR will be 130 units, so you’ll need 130 units of the quote currency USD for 100 units of EUR.
The good news is although it’s relatively easy to calculate Lot sizes, you normally won’t need to calculate the Lot size yourself. A good trading platform, like Geldex, will calculate and tell you what you need to know. It will also be clear on what Lot sizes are available when placing a trade- whether Standard, Mini, Micro, or Nano.
How to choose the Best Lot Size in Forex Trading
After your choice of Forex Broker, a very important individual decision you will have to make when you begin currency trading is finding the Lot size that best balances opportunity and risk. The Lot size you trade directly impacts how much a market or pip move affects your account; for instance, a 100-pip move on a small trade or Lot size will not be felt nearly as much as the same 100-pip move on a very large trade size. A Lot size that is too large for your trading expertise or level of trading, also makes the trade riskier and more uncomfortable to hold on to. On the other hand, a Lot size that is too small might not generate enough potential gains to be worth your while. When choosing your Lot size, think about the risk you are willing to take. The greater the Lot size, the more money you’ll be required to put down or the Leverage you’ll need to use – and the greater each pip movement (profit or loss) will be magnified.
Below are the monetary amounts (gain or loss) of a 1 pip movement for each Lot size in our EUR/USD example:
|Lot Size||Calculation per 1 Pip Move||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|
The higher the Lot size, the higher the potential gain or risk because of pip movement. So, if you’re trading with the Standard Lot for instance, for every 1 pip movement you will either gain or lose $10.
Why Would You Choose One Lot Over Another?
Each Lot Size holds an advantage. Nano Lot – Although this is the most flexible of the Lot sizes, quite frankly, it’s rarely seen in Forex Trading in recent times. Nano Lots are useful when you’re a complete novice starting out small and you want to just test the waters of Forex Trading.
Micro Lot- This is typically and usually the smallest Lot size tradeable on most platforms, given as Nano Lots are very rarely available. With 1,000 units you’ll be able to trade on a smaller account, which is why most beginner traders often use this Lot size because they want to reduce their risk exposure, minimize potential losses, and stand a fair chance of making some gains when their analyses and speculation is right.
Mini Lot – As a beginner, in order to reap the most benefits from your trading, we recommend you trade Mini Lot sizes. Many advanced traders also use Mini Lots in order to exercise greater control over their forex positions.
Standard Lot – Many traders with retail investor accounts shy away from using this Lot size. It may be tempting to trade with this Lot size, but you must strongly consider the capital required to do so safely. Standard Lots are recommended for traders who understand Risk Management quite well.
While a small Lot size may not result in high profits as you may wish, it reduces your exposure to potential substantial losses. Therefore, we advise you to start your Trading Journey with a small Lot size and increase it as you become a better and more experienced forex trader. Accompany your Lot sizes with low leverage, and have Stop-Loss and Take-Profit measures in place.
In conclusion, the Lot size you trade is at the center of your Risk Management and affects most trading parameters, including the Pip value of each currency pair, Leverage, Margin, Money Management, Stop Loss, and profit or loss. Knowing the different Lot sizes available and how to calculate the pip per Lot size, will allow you to develop efficient risk management plans when trading.
Brought to you by Geldex Invest on behalf of Growell Capital.