What is a Lot Size in Forex (Updated May 2021)?

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“Lot” is one of the most important terms that new Forex traders have to learn about. No matter whether you participate in paper or live trading, you always hear about “lot” and its different sizes. To understand its significance in forex trading and which lot size should be chosen, keep reading this article and find the answer.

What is a Lot Size in Forex?

A lot size is a specific amount of the base currency you are going to buy or sell; of which, the base currency is the first one displayed in a currency pair. In other words, it is used to measure the number of currency units that are required for a transaction.

For example, a trader opens a long position to buy 100,000 units or 1 lot of EUR/USD at the price of 1.18029. This means that he or she must sell 118,029 US dollars to purchase 100,000 units of euros.

When you open a position on a demo or real account, you are required to choose a proper lot size, a type of order (particularly, market or pending orders), stop-loss and take-profit levels. The below picture shows how a lot size is displayed on the MetaTrader 5 trading platform. Hence, those entering a trade can buy 0.1 lot of the EUR/USD currency pair, equivalent to 10,000 units of EUR.

Normally, most forex brokers prefer using “lot” to represent quantity, whilst others may show the exact number of currency units their clients plan to trade.

The trading lot size plays a crucial role in forex trading because it has a significant impact on how the price movement affects a trader’s account. Of which, the change in a currency pair’s value is called “pip”; which is closely correlated to a lot size. So, calculating pip values would help measure influences of a lot size on a trading account, thereby determining profits and losses from foreign currency trades.

Forex lots are divided into four categories as Standard, Mini, Micro, and Nano which will be explained in detail in the following parts. Accordingly, a 100-pip move in a standard lot is way different from that of micro or mini lots. This means a bigger lot can either bring higher profits or incur heavier losses. That is why forex speculators should not choose a lot size haphazardly or emotionally unless they want to face bigger monetary risks.

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Standard Lot Definition

A standard lot is equivalent to 100,000 units of the base currency and often displayed under the trading volume of 1 lot. Therefore, when opening a long position of one standard lot of EUR/USD, the lot’s value is equivalent to 100,000 EUR.

Taking the given example in the previous part, to buy 100,000 euros, you have to fork out 118,029 US dollars. Normally, a forex broker allows you to borrow funds for trading by using the leverage tool, so you don’t need to invest $118,029 in your real account. Thereby, if you magnify your trading capital up to 200 times, you only need to deposit at least $590.145. Besides, in case the US dollar is the quote currency, a one-pip movement in one lot will be always $10 and calculated according to the below formula:

The pip value in USD for 1 lot = (0.0001 / 1.18029) x 100,000 units x 1.18029 = $10

Of which, a pip equals 0.0001 when major currencies are priced out to four decimal places (except for Japanese Yen).

When the market goes in your favor, you will make a high earning. Otherwise, you will take considerable risks. So, forex traders are discouraged to use a high leverage ratio and trade with a large position because that trade setup can make their account balance quickly burn out after a few losing trades.

Mini Lot Definition

When forex speculators open 0.1 lot of EUR/USD, it means they are trading with a mini lot which equals 10,000 units of the base currency. Based on the given formula, a one-pip move would charge $1. Accordingly, fewer profits would be generated from a mini lot than those of a standard lot. In turn, using mini lots could protect their account from losing money too much when the price moves against them. Therefore, mini lots may be suitable for those who newly join in the forex market but firmly understand risk management.

Having said that, if investors improperly manage risks, mini lots cannot rescue them from running out of funds. Assume that you also use the leverage ratio of 1:200, then you only need an initial investment of $59.0145 to buy 10,000 euros. This proves a 60-pip is the biggest move as it can add up $60 loss and ruin your account when you make an incorrect prediction about the market.

Micro Lot Definition

Most forex brokers allow traders to enter the market with a micro lot – the smallest marketable lot available on trading platforms. Accordingly, speculative traders can open a 1,000-unit position or buy 0.01 lot of any currency pair. If you trade a dollar-based pair, a pip now equals $0.1 or 10 cents.

Thus, this option is safe for beginners to limit monetary risks and wish to learn more about the market. However, using a micro lot also means the amount traders receive from winning trades would be relatively tiny.

Nano Lot Definition

A nano lot is merely 100 units of the base currency, hence not many brokers give their clients this offering. Accordingly, a one-pip change would be $0.01 or only 1 cent. That move is so small that you could not notice any change in your equity. In other words, you hardly know how profitable or unprofitable your trade is when trading with a nano lot.

Still, this type of lot is offered for those who prefer starting small and want to test their trading strategies in live market conditions. Normally, novice investors are advised to practice on a demo account within at least 3 months. However, paper trading does not give traders the same feeling about monetary risks as real ones. So, some traders would be overwhelmed or wary when participating in real trades; this psychological factor partially enables them to make irrational decisions and fail afterward. The use of nano lots would both allow traders to experience real trading and minimize the risk of losing money.

Choose a Right Lot Size in Forex Trading

As already mentioned, forex traders should make wise decisions about which lot size suits their expectations and trade setups. The larger a position is, the higher profits investors may earn, but concurrently the more risks they can face. In the brief analysis of four lot types, it is deduced that choosing a proper lot size in forex trading depends on various factors such as a trader’s equity (or deposit), a leverage ratio, an acceptable level of risk, trading goals, or a trader’s experience. Particularly, when traders have small investment, but with a high leverage ratio, opening a too-large position size is rather risky.

It is rather difficult for beginners to identify a position size which is determined by a number of lots and a lot size. The simplest way highly recommended when you have recently started trading is by applying the same small lot size – normally micro lots – to all trades.

For example, your trading account has $100. With the 1:100 leverage ratio, you can open 10 trades with 0.01 lot of each. When your equity grows bigger, you may change the position size.

Additionally, a more popular way to calculate a position size is determining your trade and account risks. Based on the following formula:

Lots traded (Position size) = The Amount at Risk / (Pips at Risk x Pip Value)

The amount at risk or account risk is the percentage of loss you are willing to sustain from your equity. Imagine you want to risk no more than 1% of your trading capital ($1,000). This means the amount at risk equals $10.

A number of pips at risk or trade risk is the distance from the entry point to a stop-loss level. For example, you prefer trading with micro lots of EUR/USD at the currency price of 1.18029. You then put a stop-loss level at 1.17929, 10 pips away from the entry price. Besides, a pip value now is $0.1.

Therefore, the number of lots is $10 / (10 pips x $0.1) = 10 micro-lots. Because the pip value ($0.1) is for a micro lot, the outcome of the calculation is also displayed in “micro-lots”. Accordingly, you can leverage your capital 10 times and open 10 micro-lots. Based on this method, a position size would proportionally increase with your equity.

Further, there are many more risk management tools traders may use to calculate a suitable position size. Each technique has its advantages and disadvantages, thus forex investors should consider appropriate methods to find out which lot size is the best for them.

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