As you’re starting to get comfortable with Forex trading, you begin to dive deeper into more advanced terms and aspects related to FX trading. One of the most important questions you might have is “what are lot sizes in Forex”?. Understanding what lots are and knowing how to properly calculate them is vital for any trader who wants to make the most out of each trade and get better margins with each new trade.
So what are lot sizes in Forex?
Most traders wondering what is a lot in Forex would think of small parcels or volume. They are right. As the name implies, a lot is the number of currency units you can acquire in order to trade that specific currency. Choosing the correct lot for each trade is key for maximizing your profits and making the most out of each trade.
You can usually find four types of Forex lot sizes:
– Nano lot – 100 units: this is rarely used, because the profits are insignificant
– Micro lot – 1,000 units: these are great for beginners, as they come with a reduced trading risk and enable you to grow your skills without losing your investment.
– Mini lot – 10k units: while beginners are still encouraged to use these Forex lots, you definitely need quite a lot of capital to sustain your trades.
– Standard lot – 100k units: almost all wealthy traders and large firms use standard lots, investing thousands of dollars in the Forex market. With a standard lot, you can quickly get make 100 extra Euro with just 10 pips up.
So, what is 1 lot in forex? That lot is the standard one, representing 100k units. For example, if you were to buy 1 lot in Forex of EUR/USD currency, which is 1.18 at the moment, you would have to buy 100.000×0.85, which equals 850.000 dollars.
Of course, to properly understand what is lot size in forex, you would have to grasp the meaning of pips. Also known as “point in percentage”, a pip is a very small measure of change in a trading pair. Basically, most currency pairs have four decimal points.
For instance, EUR/USD is 1.1892. The pip is the last decimal, or 0.0002. If the EUR/USD value goes up to 1.1894, the pip value goes up by 2 pips, reaching 0.0004. In order to notice any results when trading, you need to trade high levels of a currency.
For example, if the EUR/USD goes up by 2 pips, you’ll have to trade 1000 Euros in order to gain one euro in profit. If you are trading a micro lot size, 1 pip represents 10 cents. For a mini lot size, 1 pip is $1, while a standard lot size gives you $10 for 1 pip.
Basically, if you set your stop loss level at 10 pips, you’ll lose $1 for a micro lot, $10 for a mini lot and $100 for a standard lot. As you can notice, the losses get bigger the more money your use. The opposite is also true. If you get a profit of 10 pips and you’re ready to sell, you can make $100 by using a standard lot, but only a mere $1 for a micro lot.
What About the Lot Size Chart Forex?
In order to properly use Forex lots to their full value, you need to learn how to calculate your lot size. If you’re wondering how do I calculate my lot size, all you need is a good forex lot size chart and a proper calculator. Of course, you also need to calculate the pip value. For that, you can use the calculator here: https://www.fxpro.com/trading-tools/calculators/pip.
Choosing the right lot size is paramount if you want to be successful when trading. Normally, this is dependent on two main aspects. First, you need to take into account your experience with Forex trading and your ability to withstand pressure. Second, you need to look at your capital, which represents the funds you have at your disposal for trading.
You should only use the nano lot if you’re just starting out and you have a limited amount of money. For example, you can start with $100 and play with them for a few months. You can lose $10 or make $10, but that’s an insignificant amount. However, if you start with a mini lot and you lose 10%, or $1,000, that’s much more painful than $10.
The best way to determine the correct lot size for you is to use a Forex lot calculator. There are numerous tools out there that help you calculate the right lot size for your needs based on numerous factors, such as experience, account size, risk ratio, currency you prefer, or others.
When calculating your lot size, you also need to take into account the stop loss. You want to place it at the correct level to mitigate huge losses. You need to place the stop loss at the correct level for each transaction. For instance, if placing it at 20 pips might hurt your balance, place it at 10 pips.
Diving Deeper into Lot Sizes
The great thing is that you can also calculate lot sizes on your own, using mathematical formulas. Basically, 1 standard lot is 100,000 units, 2 mini lots are 20,000 units, 3 micro lots are 3,000 units, and 5 nano lots are 500 units. The value of your pip can be calculated with this formula: (value of pip/current rate) * lot size.
Let’s dive deeper into it. Let’s say you want to trade EUR/USD, with a standard pip value of 0.0001. The value of pip equals the 4th decimal/1.18 * lot size. Basically, for a standard lot, a pip is $11.80. If the market moves 10 pips in your favor, you’ll make a profit of $118. However, for a nano lot, a pip is only $0.018. If the market goes up, you’ll only get a profit of $0.18 for 10 pips, which is insignificant.
A standard lot always has the value of 1. A 0.01 lot in Forex is the micro lot and comes with a value of $0.10 based on the EUR/USD currency. This is the lot most traders used in the beginning. While it is enough for you to risk losing some capital, it’s not a reason to panic if the market goes against you. I recommend all traders who are moving from a demo account to go with a 0.01 lot.
A 0.1 lot in Forex is a mini lot and contains 10,000 units. The value of the pip for this lot is $1 for the EUR/USD currency. A trader who chooses to use a 0.1 lot is more adapted to the market, has some experience under his belt and is looking to grow his capital by undergoing more risk. With this lot, the actual “training wheels” of the micro lot have completely disappeared.
Lastly, 1 lot is the standard 100,000 units of currency. The value of 1 pip is $10. Only experienced traders who are aiming to win big or go home should go with standard lots. Even though it’s still not such a significant amount, in a Forex market that can be quite unpredictable, the standard lot is perceived as the best value.
Of course, you can also find 5 lots or 10 lots. 5 lots come with a pip of $50, while 10 lots have a pip of $100. If you want to trade 5 or 10 lots, you certainly have a huge trading account and you can take huge risks, but also gain bigger rewards if the market is in your favor.
The Bottom Line
Just like with any other online business, Forex trading requires persistence and continual growth. The best way to understand lot sizes and to maximize their power for you is to keep trading until you’ve found the right lot size for you.
Take your time to educate yourself and to discover more about what are lot sizes in forex and how you can use them. If you have any question whatsoever, do not hesitate to contact me and I’ll guide you.
FAQ
Q: Can I start forex with $10?
A: Most brokers accept a minimum entry point of $100. $10 is way too little, even for a beginner. Add to that the fact that there isn’t a lot small than the nano lot, which has 100 units.
Q: What is the best Forex lot calculator out there?
A: There are many tools that you can use. I encourage you to choose one that gives the most accurate results. You can try out several free tools and see which one of them offers you the most accurate lot size for your position.
Q: What is a standard lot in forex?
A: The standard lot is the largest one and includes 100k units of a currency. To use one of these lots, you need to have tons of experience under your belt and an impressive capital