What Is forex trading lot size and How to calculate it?
Forex trading lot size explain, by forex forum.
Finding the lot size that best balances opportunity and risk is a very important individual decision. Using a tool like a risk-management calculator can help you clarify your decisions about lot size, but you should do so by factoring in your own risk tolerance and your trading objectives.
The trading lot size directly impacts how much a market move affects your accounts. For example, a 100-pip move on a small trade will not be felt nearly as much as the same 100-pip move on very large trade size.
What is a lot?
Before you start asking yourself, what is lot size or even begin learning how to trade forex, you're going to need to know what a lot actually is. There are some key units of measurements that you must understand in order to trade forex successfully.
Firstly, a lot is a unit of measurement used to denote the amount of currency units bought or sold in a transaction. Whenever you place an order to trade a position, that order will be quoted in lot sizes.
Forex lot size chart – How many units?
Which brings us to what is a forex lot size – The standard lot size is 100,000 units of a currency but there are others. You may also find mini, micro, and nano lot sizes. A mini lot size is 10,000 units, a micro is 1,000 units, and finally a nano is 100 units. These will all be found in a broker provided lot size chart.
What is a lot in forex trading?
A lot in forex trading is a unit of measurement that standardises trade size. The change in the value of one currency compared to another is measured in pips, which are the fourth decimal place and therefore very tiny measures. This means trading a single unit isn't viable, so lots exist to enable people to trade these small movements in large batches.
The value of a lot is set by an exchange or a similar market regulator, which ensures everyone trades a set amount and knows how much of an asset they are trading when they open a position.
A Standard LOT in Forex Trading equals to 100.000 units of any given currency. For example, 1 Standard LOT of EUR/USD equals to €100.000.
Other lot sizes commonly used are:
*. Standard Lot (100,000 Units)
*. Mini LOT (also referred as 0.1 lot) - 10.000 units of any given currency.
*. Micro LOT (also referred as 0.01 lot) - 1.000 units of any given currency.
*. Nano LOT (also referred as 0.001 lot) - 100 units of any given currency.
There are four main types of lot sizes you will come across when trading in the forex market, namely: standard lot, mini lot, micro lot, and nano lot.
1. Standard Lot.
A standard lot corresponds to 100 000 units of the base currency in a quote of currency pairs. Put in other words, 100 000 units = 1 lot.
For example: Assume you want to buy a standard lot (100 000 units) of GBP/USD. The exchange rate is 1.24, meaning you will pay USD1.24 for one British pound. What will happen is that you will purchase £100 000 with $124 000.
2. Forex Mini Lot.
The next highest lot from a micro lot is the mini lot.
This was the original "smallest" lot before technology and derivatives took over the forex to bring more people to the markets easily.
The mini lot is 1/10th of a standard lot and has a value of 10,000 units.
This means you will have control over $10,000.
The pip value is around $1 on the EUR/USD, so every time the market goes up or down, you make or lose $1.
3. Micro Lot.
A micro lot is 1% of a standard lot (100 000 x 0.01) = 1 000 units of a base currency. Therefore, when you open a trade with a 0.01 lot, you will trade 1 micro lot.
Micro lots are the smallest tradable lot available to most brokers and are a good starting point for beginners.
4. Forex Nano Lot.
A nano lot is the name given to a trade size that is 1/1000th of a standard lot.
The value of a nano lot is 100 units, or $100, and is the lowest lot you can trade.
This is where most beginners start when selecting a recommended lot size because the lot value is very low.
In fact, the value of each pip is $0.01, so every up or down movement when trading with a nano lot, you are making (or losing) 1 cent a time.
Most traders set minimum and maximum lot volume for different types of accounts. The top limit is often at 100 lots; the bottom boundary is 0.01 lots. If we take the example above, the minimum investment will be $ 1.184. If you use the leverage 1:100, then a minimum deposit of $11.84 will be enough to start.
However, it will be relevant provided that 100% of the money (which is unacceptable from the point of view of risk management) will be invested in the position. There is a second option - to use cent accounts (if the broker offers cent accounts). The only difference of cent accounts is that the calculations are in cents, not in dollars, so $11.84, in this case, is enough to buy the minimum micro lot without using leverage.
Leverage – How it works.
You are probably wondering how can I trade with Lot sizes of 100,000 base units or even 1,000 base units. Well, the answer is very simple. This is available to you from the leverage you have in your account. So let's assume that your account's leverage is set at 100:1. This means that for every $1 used, you're actually trading $100 in the Forex market. In order for you to trade a position of $100,000 then the required margin to open such a position will be $1,000. As for any losses or gains these will be deducted or added to the remaining balance in your account.
For learn more about forex trading leverage click here.
How to calculate lot size in forex?
Forex lot size can be calculated using input values such as account balance, risk percentage, and stop loss. In the first step, the trader needs to define a risk percentage for trade and then define stop loss and a dollar per pip. A trader needs to determine lot size (number of units) for currency pair in the last step.
Determine the risk limit for each trade.
To calculate risk percentage for trade using account balance, traders can define risk in dollars per position trade.
Most traders consider specifying the dollar amount or percentage limit risked on each trade as the most crucial step in determining the forex position's size. Lot size forex calculation is simply because professional and experienced traders will usually risk a maximum of 1% of their account in trade; usually, the amount is lower. While the other trading variables may change depending on the trade, most traders will keep the percentage they risk on the trade constantly, though the amount risked for the trade may be reduced if it exceeds the 1 percent limit.
On the other hand, If your Forex Broker Margin Call level is set at 100% this means that when the Margin Level reaches this percentage it will notify you to add more funds. As you can understand from the example above, the P/L, and your Margin will affect your Margin Level. Now, if your Broker sets the Stop Out Level at 50% this means that your position will be closed by the Broker when the Margin Level reaches that level.
For learn more about forex trading margin call and more about forex strategy join this forex forum.
Here are the perfect calculation of forex lot size:
You can create a ratio to determine what portion of your margin you should use to limit your max loss to 1% for an entry at that price.
Max Loss for trade = ((pip * 30)/price) * orderSize.
Max Loss for Portfolio = 0.01 * margin.
# We can set those equal to restrict our Max Loss for a trade to be at most 1% of our portfolio margin.
((pip * 30)/price) * orderSize = 0.01 * margin.
# This implies that.
orderSize = (0.01 * margin * price) / (30 * pip)
Example of lot size calculation in Forex.
Lot = contract size * trade volume * asset price.
Example 1. The contract size for a stock is 1; 1 lot is 1 stock. The stock price is 54 USD. 1 lot is 54 USD.
Example 2. The contract size for the EURUSD currency pair is 100,000; the price is 1.23456. Lot value = 1.23456 * 100,000 = $ 123,456.
PIP Value per Lot Size Formula.
*. The first part of the formula is doing a simple currency conversion, we are dividing our PIP value according to the pair we trade (0.0001 or 0.01) by the current exchange rate, that way we know how much is that PIP worth in terms of the currency we are trading.
*. The second part is multiplying that result by the LOT size we are trading (100.000, 10.000, 1.000, 100) to understand the impact of that previous number we determined in the total amount of currency units we are trading with.
How much is 0.01 lot size in dollars.
0.01 is a micro lot in forex which is 1,000 units of currency.
So 0.01 lot size would be around $1,000.
The value of the pip for a micro-lot is roughly $0.10 based on the EUR/USD.
This is usually the value most beginner traders start with. It is enough for you to risk some capital, but not enough for you to panic when the market goes against you.
You can learn more about forex trading at forum.forex.
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