What Is the Purpose of Lot Size?
Before you understand the purpose of lot size, you must ask yourself what a lot is!
A lot is the unit of measurement used to determine how many currency units were sold or bought in one transaction. When you place orders to trade a particular position, it is quoted in a lot size.
The standard lot size is roughly 100,000 units of a particular currency, but you have others, too. These include nano (100 units), micro (1,000 units), and mini (10,000 units). Look at the broker’s lot size chart, which should be shown on the website.
Every lot size available has its advantages, such as:
- Nano Lots – This isn’t seen often in FX trading, but it’s highly flexible. They are great when you want to test new theories or are a beginner and need to start small.
- Micro Lots – This is usually the smallest tradeable lot size. At 1,000 units, you may trade on smaller accounts; novice traders often use them to reduce the risk of loss.
- Mini Lots – As you start growing and understanding Forex trading, you will get more out of switching to mini lots. Advanced traders also use them to have more control over their positions.
- Standard Lots – Most retail investor traders don’t use this size. It’s tempting to do, but you must have enough capital to hedge your risks. In fact, you should have a foolproof risk management system in place to benefit from them.
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Calculating Pips and Lots – Considering the Pip Value
A currency’s value can change so minutely that another unit of measurement was created, which is called the pip. It’s a small percentage of the currency’s value.
Often, a pip is the last decimal place for a quoted value. If you traded EUR/USD when the value shifted from 3.2040 to 3.2041, the 0.1 EUR increase is considered one pip.
What’s that mean for lot size? That’s how the profit is calculated. For example, you traded GBP/USD at 10,000 units. Therefore, you have to calculate pip movements against the lot size to find your profit. If the rate was valued at 1.0300 and only moved one pip, this is the calculation:
- x1=0.00009708 GBP/unit
With the 10,000-unit trade, a single pip change is worth about 0.97 GBP (10,000x0.00009708).
Choosing a Lot Size – Micro Lots and Mini Lots
Lot size matters significantly between micro and mini lots. It’s crucial for your risk management plan. To calculate how much you’re willing to risk, you must know what lot size you’re trading with.
Many things affect how you decide the lot size to trade. These include target profits, potential leverage, acceptable risk levels, and your capital. In most cases, professional traders risk about one percent of the account capital when choosing their lot size.
You’ve likely realized that you don’t need as much capital for FX trading as you do for other instruments. This happens because there’s significant leverage.
Leverage means you’re borrowing funds, usually from a broker, and using it to increase your trading position beyond your capital capabilities. Therefore, you must know how to trade Forex correctly.
While leverage can increase your profits dramatically, it also amplifies any losses. Leverage helps you trade more lots than the account can afford, and most trading apps offer it. For example, if you have a 100:1 leverage, you can trade 100,000 USD/JPY lots for $1,000.
How Do I Choose the Forex Lot Size?
You must think about the risk you wish to take to choose a lot size. A larger lot size means you have to put more money down or leverage it. Therefore, each pip movement is magnified significantly.
If we assume you’re trading EUR/USD, one pip movement is worth these amounts:
- Nano = $0.01
- Micro = $0.10
- Mini = $1
- Standard = $10
The currency value depends on that base currency of the pair you trade. Clearly, a smaller lot means a lower cost for one pip movement.
Forex Lot Sizes Examples
How much is a single lot in Forex? This depends on the type you’re trading. FX trades are divided into four standardized units of measurement to account for any small changes within the value of the currency.
In the examples below, we’re using EUR/USD, which will compare the Euro against the United States dollar (quote currency). For context, you speculate the Euro will strengthen against the dollar if you purchase EUR/USD. With a quote price of $1.3000, you can exchange one Euro for $1.3000 or need $1.3000 to buy one Euro.
- Standard Lot – A standard Forex lot equals 100,000 currency units. With a EUR/USD exchange rate of $1.3000, a standard lot of EUR is 130,000 units. At that current price, you’d require 130,000 units of USD to purchase 100,000 EUR units.
- Mini Lot – A mini lot in Forex is one-tenth the size of the standard lot. Therefore, it’s worth about 10,000 currency units. With a EUR/USD exchange rate of $1.3000, a mini lot of EUR is 13,000 units. At that current price, you’d require 13,000 units of USD to purchase 10,000 EUR units.
- Micro Lot – A micro lot in Forex is one-tenth the size of the mini lot. Therefore, it’s worth about 1,000 currency units. With a EUR/USD exchange rate of $1.3000, a micro lot of EUR is 1,300. At that current price, you’d require 1,300 units of USD to purchase 1,000 EUR units.
- Nano Lot – A nano lot in Forex is one-tenth the size of the micro lot. Therefore, it’s worth about 100 currency units. With a EUR/USD exchange rate of $1.3000, a nano lot of EUR is 130. At that current price, you’d require 130 units of USD to purchase 100 EUR units.
How Do You Calculate the Lot Size When Trading Forex?
Normally, you don’t have to calculate lot sizes yourself because the trading platform will tell you what you should know. It should be very clear what options are available when placing a trade, such as nano, micro, mini, and standard. Likewise, it should lay out the lot size you will use.
However, if you want to do it yourself, you may calculate the overall position size by the lot size and number of lots you’ve purchased.
Conclusion
It’s crucial to understand lots and pips if you want to trade Forex effectively. Here’s what you learned today:
- A Forex lot is a unit of measurement that determines how many units of the currency you will buy.
- There are four lot types in Forex: nano, micro, mini, and standard
- Pips are the last decimal place of the quoted value, which is how profits are calculated for lot size.
Understanding these things will help you trade Forex well, but you must also know how much risk you’re willing to take.
