What is a Forex Lot Size?
And what should be the ideal lot size?
If you are into forex trading you must have came across the word LOT. The unit that determines the volume of the trade you will open in the Forex market is the lot. As you may have experienced, there is a lot of variety in the forex trading sector when it comes to lot sizes. This does give you the flexibility as a forex trader to choose an amount of money to invest that suits you and also to maintain a good level of risk management in trading.
In this article, i am going to tell you what a lot size is and what are the different types of lot sizes.
From the very beginning of our civilization we humans have assigned certain units to everything we buy or sell. Everything from fuel-oil to gold is measured in certain units and you buy or sell it in those particular units.
Consider you go out to buy beer, how do you measure the quantity of beer you are buying?
It’s obvious that you will have to buy it in terms of gallons or liter. In the same way when you buy or sell anything in the forex market, you do that in a unit called as a lot. When you first get into forex without any prior knowledge about forex trading, you must have come across the word lot and must have kept yourself wondering about what it actually means.
LOT is the unit in which a trader buys or sells currency in the forex market. There are different lot sizes and each lot size has a certain value assigned to it. For instance, if you have to buy 10.000 units of any currency, you use the mini lot size and based on this you have profit and losses. In this article, I will provide you with all the information you need about lot size.
But before getting started with LOT, it would be better reviewing the pip issue firstly. What was the pip?
A pip is the basic unit of measurement or value when a currency pair moves. The fourth number after the decimal place is the pip.
will be more understandable with a few examples:
If EUR/USD currency shows 1.2127, then what is the pip over here?
The 7 is the pip. And if that moves from 1.2127 to 1.2126, it means that we’ve moved one pip down.
One more Example
USD/JPY is looks like 108,64 on my market screen now, So what about what is the pip over here?
The second number after the decimal place. In this case the 4 is the pip.
There are four types of lot sizes:
1. The standard lot
2. Mini lot
3. Micro lot
4. Nano lot
- Standard Lot Size (1.0) [1 pip= $10]
One standard lot size is equal to hundred thousand units of any currency you are buying or selling. This means that when you buy 1 standart lot in the forex market, you will buy 100.000 units of your related currency. For instance, if you take a long position on USD/JPY currency with one standard lot size, this means you bought hundred thousand units of USD.
As a second example, if you open 1 lot buy position in EUR / TRY exchange rate, you will buy 100.000 Euros.
So when you use one standard lot size and every pip gives you ten dollars. If you have made 10 pips with a standard lot, this means that you made $100. If you have made 10 pips with 20 standard lots, this time means that you made $200.
Also, A standart lot is 10 times larger than a mini lot.
2. Mini Lot Size (0.1) [1 pip = $1]
Mini lot corresponds to 1/10 of 1 standard lot. That’s why it is shown as 0.1. The mini lot is one of the most commonly traded units and also one of brokers favorites. One mini lot size is equal to 10.000 units of the currency you are buying or selling. This means that, if you are opening a trade position with 1 mini lot, you are buying 10.000 units of that currency. For instance, If you open 1 mini lot buy position in AUD / TRY exchange rate, you will buy 10,000 Australian Dollars.
If you are opening a trade position with a lot size of 0.10(standard lot) you are buying 10.000 units of that currency.
Also, A mini lot is 10 times larger than a micro lot. And, basically every pip with one mini lot size gives you one dollar.
3. Micro Lot Size (0.01) [1 Pip = $0.10]
One micro lot size is equal to one thousand units. This means that if you open a trade position with a lot size of 0.01, You get 1000 units of that currency. In other words, 1 micro lot corresponds to 1 percent of a lot. That’s why it is shown as 0.01. For instance, If you open 1 micro lot buy position in USD / TRY exchange rate, you will buy 1,000 Dollars. Furthermore, if you are using x100 leverage, your 1 micro lot trade will be opened if you provide 10 dollars as margin.
So here’s some examples, if you open a buy trade on GBP/JPY with one micro lot size that is 0.01, this means that you bought 1000 units of GBP.
If you made 10 pips trading one micro lot, what would that be worth? That would be one dollar worth.
If you made 10 pips on 5 micro lots, you have made $0.5.
10 pips equals one dollar or if you’re trading in the Turkey, 10 pips equals one Lira or if you’re in a UK account, 10 pips equals 1pound.
Briefly, you made 10 pips, each one of pips was worth 10 cents. If we calculate each pip at 10 cents, it makes 1 dollar in total.
And, basically every pip with one micro lot size gives you 0.10$ or costs you 0.10$.
4. Nano Lot Size (0.001) [1 Pip = $0.01]
Since it corresponds to very small units, It is a trading unit that you cannot find in every forex company. Although very few brokers allow you to trade with nano lot sizes, It can be very useful if you are a beginner and want to start live forex trading with a very small initial investment.
If you open 1 nano lot long position in CHF / TRY exchange rate, you will buy 100 Swiss franc.
One nano lot size is equal to 100 units of the currency you are buying or selling. This means that if you are opening a trade position with a lot size of 0.001 you are buying 100 units of that currency. So if you open a buy position on GBP/JPY with one nano lot size. This means that you bought 100 units of GBP.
And, basically every pip on one nano lot size gives you 0.01$(1cent) or costs you 0.01$.
Why does lot size important?
You never win in forex without a stable risk management plan. A trader should always be aware of the risk involved in a trade and also the amount of risk he can take based on the account.
Using larger lot sizes on small accounts often lead to overleveraging of your account and doing this can blow your account within the blink of an eye. So, a trader have to know the proper use of lot size so that he can manage the risk effectively.
How to calculate lot size?
You have to calculate the lot size of your trade based on risk management, the potential risk in the opportunity and other factors.
For instance, the logical risk management for a forex trader is to risk only 3% of the account per trade. If you are a risk addict like me and If your blood is pumping fast like me, you can up this ratio from 3% to 7%. But it musn’t exceed 7%.
So, let’s assume you have an account of $1000. You got an credit that has a risk of 30 pips. So based on the above information the lot size you can use is 0.10.
Calculation
3% of $1000 = $30
30 pips @0.10 = $30
So, you can use a lot size of 0.10 on this trade as by using a mini lot you are risking only 3% of your account per trade.
What About How Much Is 1 Lot For Commodities?
Commodities such as gold, silver, oil, natural gas. How much is 1 lot on these goods? In gold, that is, in XAU, 1 lot is determined as 100 ounces. In addition, 1 ounce corresponds to 31.10 grams. In silver, 1 lot corresponds to 5000 ounces. In oil, 1 lot of oil corresponds to 100 barrels. In natural gas, 1 lot equals 100,000 cubic meters.
Now, you have the necessary information about the LOT and you have just reduced the possibility of opening a large transaction by mistake to zero.
I wish you guys prosperous days.
And stay tuned, Aegeanocturne.
