What is lot size in forex trading?
Did you meet a forex trader recently and he was talking about lot size in forex but you could not relate? or you just need a more detailed explanation of the term; “lot size”.
In this article, I will be providing a detailed explanation of what a lot size in forex is.
What Is a Lot Size In Forex Trading
A lot size is the number of currency units that a trader is willing to buy or sell.
In addition, it is the size of a trader’s trade in the forex market.
Lot sizes are of four types, they are the standard lot size, the mini lot size, the micro lot size, and the nano lot size.
A standard lot size is equal to 100,000 units of a currency. It is always of the volume of 1 ( Lot size is always referred to as volume on many trading platforms). One standard lot size is worth 10 USD.
A mini lot size refers to 10,000 units of a currency. It is always of the volume of 0.1. One mini lot size is worth 1 USD.
A micro lot size is equal to 1000 units of a currency. Its volume is 0.01 and it is worth 0.01 USD.
A nano lot size refers to any number of units of a currency pair that is less than 1000. Forex traders do not use it often due to its small size.
However, the worth of these lot sizes in other currencies can be calculated or gotten online.
Let us take a quick example.
A trader decides to trade the EURUSD pair with a standard lot size on his $5,000 account. What does this mean?
This means that he wants to sell 100,000 units of the counter currency which is the United States dollars (USD) to buy the base currency, Euros(EUR).
How To Calculate A Lot Size.
The lot size to be used in a trade can always be calculated.
One of the ways to calculate a lot size is by using the formula:
Lot size = Capital × percentage risk per trade/ SL × value per pip.
Capital = Trading capital.
Percentage risk per trade = the percentage of the capital that is a trader is willing to risk.
SL = Stop loss.
Lastly, value per pip = The worth of a currency per pip.
This can be calculated too or gotten online.
Let us take a quick example using my senior’s account.
Firstly, his capital was 50%. Due to his small capital, he was ready to risk just 2% of his money. His stop loss was just 10 pips away from his trading point. Value per pip of the EURUSD currency pair = 10 USD.
Lot size = 50 × 0.02/ 10× 10 = 0.01.
This means that he is to use a micro lot size for his account.
However, many broker and forex websites have helped traders by providing different online lot size calculators.
Although, you can always make use of the formula provided to confirm the lot size that a calculator provides for you.
Frequently Asked Questions (FAQs)
A 0.01 lot size is a micro lot size. It means that a trader is willing to buy or sell 1000 units of a currency.
A 0.1 lot size is a mini lot size and it means that a trader is willing to buy or sell 10,000 units of a currency.
To determine the lot size for an account, a trader can decide to use the formula that was provided above or make use of an online lot size calculator.
A lot size is the number of units of a currency that a trader is willing to buy or sell.
In the calculation of a lot size, the value per pip of a currency is always needed.
However, proper risk management is key to avoiding huge losses in the financial market.
In addition, the forex market has rules that guide it.
An individual must understand the basic and advanced knowledge of technical and fundamental analysis before he decides to trade.
Was this article helpful?
Now, you have two things to do before you go.
Drop a comment.
Do not be selfish, share with friends so that they will not end up like my senior.