If you trade forex, you’ve probably come across the term “lot size”. The lot is the unit that defines the volume of the trade you will open in the forex market. As you may have experienced, there is a variety of lot sizes to choose from when executing a trade.
This gives you the flexibility as a forex trader to risk a comfortable amount of money per pip (combined with your stop loss) while maintaining a good risk management level.
In this article, I will explain what a lot size is, the many types of lot sizes, and how to calculate it. That and more are covered in this article.
In forex trading, a lot is a unit of measurement that standardises trade size. The difference in the value of one currency over another is measured in pips, which are the fourth decimal place and hence relatively small measurements. Trading a single unit is thus impractical, but several platforms allow people to trade these small movements in large quantities due to leverage.
The value of a standard lot is standardised, ensuring that everyone trades a set amount. There are exceptions when we refer to spread betting, where we refer to volume and not lots.
Lots are subdivided into four sizes: standard, mini, micro, and nano, to give traders greater control over the amount of exposure they have.
In recent brokers also have introduced cent accounts, which is an entirely different topic.
Assume a company sells candy boxes in two sizes: 12 and 24 candies. These are standard sizes that customers have become used to. They don’t usually expect to buy just one candy from a box.
The same is true for forex currency pairs. You don’t simply buy one currency unit; you buy many of them. Lots come in universally recognised standard sizes. For the currency pair GBP/USD, you may buy 100,000 units of the base currency GBP. That’s a standard lot.
You might also buy a micro lot of 1,000 GBP.
So, how much does one lot of forex cost? It depends on whether you’re trading a standard, mini, micro, or nano lot. Forex trades are divided into these four standardised units of measurement to account for small changes in the value of a currency.
The examples below are all related to the currency pair EURUSD, which compares the euro (the base currency) to the dollar (the quote currency). Put another way; if you buy EUR/USD, you’re speculating that the euro will strengthen versus the dollar. If the quoted price is currently $1.3000, you can exchange €1 for $1.3000. To put it another way, $1.3000 is required to buy €1.
In forex, a standard lot is equal to 100,000 currency units. It is the standard unit size for independent and institutional traders alike.
One standard lot of the base currency (EUR) would be 130,000 units if the EURUSD exchange rate were $1.3000. This means that at the current exchange price, 130,000 units of the quote currency (USD) are required to buy 100,000 units of EUR.
The size of a mini forex lot is one-tenth that of a standard lot. A mini lot in forex is, therefore, worth 10,000 currency units. Because a mini lot is smaller than a standard lot, the profit and loss effect is lower.
One mini lot of the base currency (EUR) would be 13,000 units if the EURUSD exchange rate were $1.3000. This means that at the current exchange price, 13,000 units of the quoted currency (USD) are required to buy 10,000 units of EUR.
The size of a micro forex lot is one-tenth that of a mini lot. That is, it is worth $1,000 in currency. Pip movements result in a cash swing of one currency unit, for example, €1 if trading EUR. Micro lots also require less leverage; thus, a swing will have a less financial effect than larger lot sizes.
One micro lot of the base currency (EUR) would be 1300 units if the EURUSD exchange rate were $1.3000. This means that at the current exchange price, 1300 units of the quote currency (USD) are required to buy 1000 units of EUR.
The size of a nano forex lot is one-tenth that of a micro lot. It is equal to 100 units of currency. A one-pip movement in a micro lot is equivalent to a price change of 0.01 units of the base currency you’re trading, for example, €0.01 in EUR.
One nano lot of the base currency (EUR) would be 130 units if the EURUSD exchange rate were $1.3000. This means that you would need 130 units of the quote currency (USD) at the current exchange price to buy 100 units of EUR.
Typically, you won’t need to calculate the lot size manually since your trading platform will tell you everything you need to know. When placing a trade, it should be clear what options are available – standard, mini, micro, and nano – and the lot size you’re using. The size of a lot and the number of lots you’ve bought may be used to calculate the overall size of your position.
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Consider the risk you are willing to take while determining the size of your lot. The larger the lot size, the more money or leverage you’ll need to put down – and the more each pip movement will be magnified.
If you’re trading EURUSD, a one-pip movement is worth the following monetary amounts (if you are trading on a USD account currency) for each lot size:
Remember that the base currency will determine the currency value in your trading currency pair. As you can see, the smaller the lot, the lower the cost of a one-pip movement. That means you can have a smaller outlay by trading smaller lots.
An optimal risk management model should provide answers to the following questions:
What level of risk is the trader willing to take on?
What are the acceptable losses in terms of profit targets? The greater the risk, the greater the potential profit. Conversely, the number of potential loss increases. Everyone finds the best balance for himself. Alternatively, a combination of conservative and aggressive strategies is possible.
What must transaction volume be to comply with the rules of the risk management system?
The rules of risk management are based on mathematical probability and progression. The transaction volume is calculated based on the average and current volatility, the amount of the deposit, and the leverage that reduces the amount of the collateral blocked by the broker.
What is the level of allowable drawdown, and at what level should you place your stop loss?
The trader estimates the level of volatility and determines the stop loss point based on the position volume and, accordingly, the point’s value.
The following are the input parameters for building a trading model that affects the level of risk: transaction volume in lots and lot type, leverage, pip value, volatility, spread level, risk per transaction, the total risk level of all open transactions to the deposit, deposit amount, target profits.ATR Indicator - Average True Range — 2023
Models for manually calculating the optimal lot size and using a lot value calculator:
Almost all trader’s calculators have the same problem: you cannot calculate the lot volume concerning the risk level, even though this is the point of planning trading volumes. I recommend that you use the following formula to calculate the lot in terms of the risk level:
Lot volume = (% risk * deposit) / А * (Рrice 1 – Рrice 2)
The percentage risk is the amount of the deposit the trader is willing to allocate for the trade (the notorious recommended 5% I mentioned before). A is a coefficient that equals 1 in the long position and -1 in the short position. Price 1 and price 2 are the opening and stop loss levels. In this scenario, the stop loss level is one of the options for averaged or maximum volatility, which I also mentioned earlier.
Input values like account balance, risk percentage, and stop loss may be used to calculate forex lot size. In the initial step, the trader must define a risk percentage for the trade, followed by a stop loss and a dollar per pip. In the last step, a trader must determine a currency pair’s lot size (number of units).
Traders may define risk in dollars per position trade to calculate risk percentage for trades using account balance.
Most traders consider specifying the dollar amount or percentage limit risked on each trade to be the most crucial step in determining the size of the forex position. The reason for the lot size forex calculation is that professional and experienced traders usually risk no more than 1% (risk appetite dependent) of their account in a 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 constant; however, the amount risked for the trade may be reduced if it exceeds the 1% limit.
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 additional funds. As you can see from the example above, your P/L and margin will impact your margin level. If your broker sets the stop out level at 50%, the broker will close your position when the margin level reaches that level.
You should choose the lot size based on the following factors:
You will never win in forex until you have a stable risk management plan. A trader should constantly be aware of the risk involved in a trade and the amount of risk he may take based on the account.
Using larger lot sizes on small accounts often leads to overleveraging, which may blow your account in the blink of an eye. As a result, a trader must know the proper usage of lot size to manage risk effectively.
Knowledge of different lot sizes is one of the must-haves in forex trading. It can be your risk management tool as you can determine the amount you are putting on stake, and so does the targeted output. If you are unaware of this technical term, you will be in trouble and may face significant losses.
If you don’t want to spend much time reading the guide, you can use the lot calculator provided by the broker you have an account with.
In forex, there can be no best or worst lot size. The following factors determine the proper lot size:
The optimal transaction volume is also affected by market conditions such as volatility and fundamental factors. What is the best Forex lot size? You can only determine for yourself.