What Is Forex Lot Size – An Expert’s Take 2023
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If you are a new trader and getting your feet wet with forex training, you may have come across the term trading lots. A forex lot is a measurement unit used to express the amount of currency you are trading. The standard size for a lot is 100,000 units.
If you wish to trade the forex market, one of the first things you have to learn is the concept of lot size. The concept lies at the center of how you manage the risks involved in trading the forex, which, in turn, determines your long-term success in the game.
The lot size fluctuates. Common designations for lot size include standard, micro, and mini lots. Remember that the lot size directly corresponds with how much risk you’re taking on. In forex, you often need to buy a large quantity of something for it to have any real worth.
For a better understanding of Forex Lot Size, we have got Ezekiel Chew, a well-reputed and seasoned forex trader who will elaborate on the lot size. So, read through the guide below to understand the forex lot size, how it affects your trades, and more. But, then, let’s get right into it!
What is Forex Lot Size
A Forex lot is a standard unit of measurement. The standard size for a lot is 100,000 units of currency. Currency pairs are used for trading currencies. The value of one currency is compared to the price of another. The base currency is referred to as the reference currency, while the quote currency is known because it quotes the value of a particular asset or index.
The value usually changes fractionally. We assess these price shifts in ‘pips.’ Pip is an acronym for percentage interest points. For most asset pairs, pips are denoted with the fourth decimal place.
Forex lots are essential for currency trading because they enable traders to purchase multiple currency units. By doing this, traders can benefit from small market movements and make a profit.
The value of a forex lot is generally set by an exchange, a nation’s law, or other market regulators. This helps guarantee that all market participants know the lot size and the number of currencies it represents.
Lot Sizes Explained
Lot sizes are divided into four different sizes that include:
- Standard lot
- Mini lot
- Micro lot
- Nano lot
#1. Standard Lot
A standard lot refers to 100,000 units of currency. Institutional and retail forex traders use this figure when discussing lot sizes. Many skilled traders maintain normal retail investor accounts of $100,000 or less.
Assume the GBP/USD exchange rate is $1.5.000, and you must hedge your position for one year or until the initial contract term ends. This rate is USD because it’s the quote currency for the above pair. One lot of GB Paper would be worth 150,000 units of the USD. In this situation, you’d need 150,000 units of US dollars to buy 100,000 pounds sterling.
One pip movement equals $10 worth of your account when trading on a standard lot. If the market shifts 20 pips in your favor after you’ve crossed your order, this indicates that you’ve made a gain of $200, and vice versa.
#2. Mini Lot
The mini forex lot is 10,000 currencies. It’s one-tenth of the standard amount and used by average-day traders who don’t want to use much leverage. Also, with a mini lot account size, each pip movement is worth $1.
Although ‘mini’ might make the lot size sound relatively modest, this is inaccurate. In actuality, mini lots are considered on the upper side of standard lot sizes–especially when you account that markets can move hundreds of pips in a single day.
If the exchange rate for GBP/USD is $1.5000, then a mini lot would be 10,000 units of USD. So to purchase 10,000 units of Pound Sterling, you would need 15 000 units of the US Dollar.
#3. Micro Lot
A micro lot is a lot with a value of one-tenth that of a regular mini lot. It’s the same size as a tiny lot but has ten times the value. Because of their compactness and worth, not all dealers provide micro lots. Instead, it is most popular among novices just starting in finance. By investing in a fractional share, investors can trade with less money and still experience the full market.
The most crucial thing to understand about trading in the micro-lot is that each pip movement represents $0.1. This implies that if the market shifts 20 pips, your account will grow by $20.
Assume that you are trading the GBP/USD currency pair and the exchange rate is $1.5 thousand, which means a micro lot represents 1,000 US dollar units. This implies that you’ll need 1550 USD to acquire 1000 Pounds sterling.
#4. Nano Lot
The nano lot is the smallest lot in forex available and is worth 100 currency units. Although there’s little room for error or profit, this size is still widely used among new traders who want to gain experience without losing money rapidly.
When trading with a tiny lot size, one pip movement represents $0.01. This implies that if the market advances 20 pips in any direction, your account will grow by $2.
Given an exchange rate of $1.5000, a nano lot would represent 100 units of the US Dollar in this scenario. This implies you’ll need 150 units of the US Dollar to buy 100 units of the Pound Sterling.
How does a Lot Size in Forex affect profit or loss?
Every trader should understand how forex trading affects their trading strategy and size. In addition, forex experts understand how to modify their lot sizes depending on the situation to optimize earnings and minimize losses.
Pip Value Per Lot Size
The pips values per lot size determine your profit or loss on each lot. It aids us in calculating how much money we make or lose for each pip movement. It considers the currency value (number of currency units) you are trading with.
It’s vital to understand that the pip value per lot size is always presented in the base currency of the pair you’re trading. So, for example, if you’re trading the EUR/USD, the pips per lot size would be represented in USD.
PIP Value Lot Size Formula:
Pip Value=((1 pip)/(Exchange Rate))×Lot Size
- If you are trading EUR/USD and the current exchange rate is 1.1300 USD, one pip would equal 0.0001
- Assume you’re trading in tiny amounts for the example shown above
- US Dollar is the quote currency while EUR is the common currency
Here is the formula to calculate the PIP value:
As a result, the pip value is 0.88 Euros since this is our base currency. To convert this into USD, simply multiply the price of your chosen instrument by the current exchange rate, which in this case is 1.1300. This means that if you make or lose $1 for every pip movement you make or prevent.
If the base currency is USD, you don’t need to use an exchange rate. If the base currency isn’t US Dollars, you have to convert it so that the pip value is in USD. For example, if you’re trading USD/JPY and want to get the number of Yen in US Dollars, then you would need to conversion process for that.
Best Lot Size to use
The size of the lot you trade is entirely up to your discretion, though it will be based on numerous factors such as your strategy, risk tolerance, and trading method. For example, those who day trade often use mini lots, while swing traders who data-strengthen their holdings over long periods commonly employ standard forex lots. This discrepancy is due largely in part to different investment objectives.
Retail traders who utilize cent accounts prefer to trade with nano or micro lots to obtain the leverage brokers provide. Leverage is the amount of money you can use to trade with after putting down a deposit with your broker. It allows you to engage in currency transactions using more money than you have stored in your account.
It depicts that the greater your lot size, the more currency units you’ll need to trade in. A bigger forex lot has a greater danger, but a smaller one has lesser risk. A larger lot always indicates that you are dealing with more currency units.
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Ezekiel Chew is a professional forex trader and trainer. He is the founder of Asia Forex Mentor, one of the largest forex education companies in the world. He has 2 decades of experience in the forex market and is respected for his knowledge and expertise.
Ezekiel’s core program, ‘AFM PROPRIETARY ONE CORE PROGRAM,’ is the Complete Program, which covers everything from beginner to advanced. The program is designed to give you the best possible chance of success in the forex industry. It is backed by mathematical probability and has been used by banks and trading institutions for years.
Ezekiel is a highly credible figure in the forex industry. So, if you are trying to make money in forex trading, you should check out his program to start your forex career.
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Conclusion: Forex Lot Size
It’s essential to understand the implications of lot sizes in forex trading is essential before getting started. This is because the size of the lot you trade will directly affect your potential profit or loss. Therefore, it’s essential to clearly understand how much each pip is worth to adjust your position size accordingly.
Forex lots are highly affected by trade sizes, forex broker choices, and trading accounts. You can use all these factors to choose the right lot size.
Before you start trading with forex lots, it is recommended that you use a nano and demo account. This will allow you to get familiar with lot sizes and how they work without risking your own money. Risk management is essential in forex trading and can be the difference between success and failure.
Forex Lot Size FAQs
What is the most popular lot size?
Many experienced traders use mini and micro-lots as it allows proper risk management and is a good starting point for newcomers in the market.
The average trader doesn’t utilize large lots since they’re deemed high-risk. Meanwhile, nano lots are too small and therefore useless for investors who have invested much money into the market.
Does the account size influence lot sizes?
Yes, account size does influence the lot sizes that are traded. For example, a big account holder must trade large lots to profit from a small price change. On the other hand, a small account holder would need to trade using micro lots.