This week I have received two similar questions; “what is a forex lot size” and “what is a lot size in forex?”
As a result, I thought it would be prudent to write on this topic.
What is Lot?
A lot stands for the size of your forex trades. It can also mean the number of currency units you will trade in forex.
When you commence your forex training, you get to learn how to trade lots.
A lot refers to the smallest available trade size that you can put when trading the currency pairs in the forex market.
Brokers tend to refer to lots by additions of 1,000 units or simply a micro lot. It is important to note that the lot size openly affects and indicates the amount of risk you’re taking.
What is a Forex Lot Size?
This might be a bit different from the stock market since if you purchase 10,000 shares, 100,000 shares, or 5,000 shares, that is basically the numbers that you use.
However, when you are dealing with forex, there are some terms that you may want to learn and understand. Among them there is
- Standard Lot (100,000 Units)
- Mini Lot (10,000 Units)
- Micro-Lot (1,000 Units)
- Nano Lot (Below 1,000 Units)
Let us have a good breakdown below on what is a forex lot size by assessing the inherent units
1 standard lot is equal to the volume of 100,000 units. Every time you buy 1 lot of a currency pair, you purchase 100,000 units of the base currency (this the first currency that appears in a pair).
For example, buying 1 lot of the USDCAD means you buy 100,000 USD.
In another example, you may want to buy the USDCAD currency pair at the exchange rate of 1.4. This means (1 USD = 1.4 CAD).
When you buy 1 lot of this currency pair, which is equivalent to 100,000 USD, you tend to buy $140,000 (100,000 x 1.4).
In case you use a leverage of 1:50, you simply pay $2,800 (140,000/50 = $1,500) in order to open your position.
Beginners in forex trading are mainly advised to trade with mini, micro, or nano lots so as to prevent the risk of the huge potential losses.
A mini lot is the same as 10,000 units, which is 10% of a standard lot. As a result, when a trader opens an order of 0.1 lots, he/she is trading 1 mini lot.
This is equivalent to 1000 units, which represent 1% of a standard lot.
If a trader opens an order of, let’s say 0.01 lots, he/she is trading 1 micro lot.
A good example is when you are buying 0.01 lots of EURUSD; it means you are buying 1,000 units of EUR.
This forex lot size is referred to as 10 or 100 units. There is a difference of units since some forex brokers set nano lot to 10 units, and others set it to 100 units.
Nevertheless, the nano lot is not popular, given that it is only a few brokers that tend to offer it. Mostly, the nano lot is the preferred choice for beginners or traders who are testing their trading strategies.
Why Your Forex Lot Size Matters
By now, you are aware of what is a lot size in forex. Let us now see the importance of forex lot size.
To enable a trader to better manage risk and other related trading essentials, including a relevant degree of leverage, having an idea of the appropriate lot size to trade can be very important, almost as important as choosing your entries or the direction you ought to take a position in.
The size of the lots you trade with, which can impact the size of the positions you take, will directly impact the effect of market movements on the profit or loss associated with a given trading position.
The larger the minimum trading lot size or unit you use as a forex trader, the higher the effect every minimum sized trade will have on the entire account’s profitability when the currency pair makes a substantial move.
Essentially, the way to achieving good risk management is determining the optimum lot size for the amount of funds you have and assess what you are comfortable with losing for every trade that you take.
Calculation of the Forex Lot Size
The good thing is that even for traders that do not know what is a forex lot size, they can still calculate it using a lot size calculator.
Let us do a small example here.
What is the forex lot size that can be used to protect his/her trading account from being exposed to excessive risk?
This can be calculated using a position/lot size calculator.
Evidently, the trader can only use a maximum of 15 micro-lots, which is equivalent to 0.15 lots in this trade.
In case this trader purposes to take more than one trade, then the available lot size must be shared by the number of trades involved in order to get a new lot size measurement that will help to stick within the limits of the desired risk.
PS: I tend to use MyFXBook as my position size calculator or lot size calculator.
The Impact of Market Volatility on Forex Lot Size Choices
Knowing what is a forex lot size and how it is calculated would not be enough without knowing how it is impacted by the market volatility.
Measuring volatility in the currency pairs that you particularly wish to trade gives you the ability to test market conditions better and make better decisions as a result.
Generally, the more exchange rates change, the higher the market volatility is. Not only does volatility change frequently in a particular currency pair, but volatility also tends to differ for the various currency pairs at any given time.
As a forex trader, you ought to know the market volatility by having a way to assess it.
One common way of doing this is the assessment of historical volatility, which is connected to the standard deviation of past price movements.
Another option is observing the implied volatility in the market for the specific currency pair you are trading.
With regards to volatility and lot size choices, traders ought to be ready to change their trading sizes downwards as volatility rises and upwards as volatility falls so as to ensure a more uniform degree of risk during their trading session.
Competent traders should also purpose to change the take profit and stop-loss orders appropriately to account for substantial shifts in market volatility.
Now you have learned what is a lot size in forex. It is evident that the forex lot is an important aspect that traders ought to think through before placing a trade.
Traders ought to use lot sizes that adapt to acceptable risk limits. Lot sizes will thus have to be deliberated upon when selecting a broker, when funding the account and, of course, before taking on a trade position.
The broker that you choose is key since some brokers may only allow specific position sizes on their platform.
When a trader with $1,000 selects a platform in which mini lots are the minimum position size that can be traded, then the account will be very open to risk and may encounter a margin call.
Having sufficient funds is also important so as to assume certain levels of forex position sizing.
Definitely, the more money you have in your trading account, the more the open positions you can have at any given time.
I hope your question of what is a forex lot size has been answered.