What Is Lot In Forex? How To Calculate Lot Size Effectively?
Forex Lot is an integral part of Forex trading. As a result, to understand Forex trading completely, one must grasp the concept of a lot.
Traders need to go through this term and understand clearly, what the lot is in Forex. Each term is interrelated with each other. Moreover, you cannot skip one part without understanding another one.
In this article, you will get a clear overview of different types of lot sizes and the effective calculation on pip value using a Forex lot size.
Before calculating the pip value, read this “What is Pip” article to more about forex Pip.
The article will also give you an idea on how to calculate the lot size or the position size for day traders.
In terms of Forex trading, lot size indicates how much currency unit you are buying and selling. Let’s describe the term with meaningful examples.
What Is Lot In Forex
A lot is an important element in forex trading, and also in forex risk management.
A lot is defined as the size of a transaction, which is used for trading forex. It also refers to a bundle of units in the currency market.
From the beginning of the trading time, currencies were traded in specific amounts, which were known as Lots. Selecting an effective lot depends on the type of account you have with your Forex broker.
Apart from these, there are a few categories of forex lot sizes. We will go through all of these categories one by one.
By using an example of a lot, we are going to make it easier for you to understand.
Suppose, you are willing to trade the currency pair EUR/USD. For trading currencies, you have to select a lot size or transaction size.
After selecting a Forex broker, you will be suggested by that broker to choose a specific unit to open a position in the trading market.
If the suggested amount is 1000 units of USD/EUR to open a position, then this is your lot size. This size is considered a micro lot.
That means you have chosen to buy a micro lot of USD/EUR. Moreover, you are buying $1000 worth of the US dollar at the exchange rate of 1.3530.
The rising exchange rate will indicate your profitable way of trading, and the decreasing exchange rate will indicate the loss.
To calculate profit or loss in Forex trading, you have to multiply the PIP VALUE with the LOT SIZE.
Suppose, the LOT SIZE is 10,000 units and the price of the base currency is rising from $1.3456 to 1.3556. So, it moved upwards by 100 PIPS.
Types Of Forex Lot Size
There are few categories of lot size in Forex trading. These categories depend on the account size of traders. On the other hand, Lot sizes also depend on the trader’s account equity and leverage.
The units are fixed for each of the lot sizes starting from Nano size to Standard.
We will give a short description of one by one.
The nano lot is the smallest lot amount starts from 100 units.
In the forex trading, traders have the facility to select the trading position size according to the trading amount. Nano lot helps traders to trade with a very small amount.
You have to check the pip amount before starting a trade. The pip value will be decided by the brokers.
In a nano lot, you can start with a small amount which I already mentioned before.
Starting with a small amount help you to control your risk amount, and it is convenient for your trading.
By trading with nano lot, your stress level will not rise. If you are starting with 100 units then you are only at 1% risk.
The micro-lot starts with the amount of 1000 units. The pip value of the Micro lot is 0.1. So, the base currency will be 1000 units.
Suppose, you are ready to open a position of EUR/USD. So, you can trade 1000 units of the base currency. Here, the EUR is the base currency and traders can buy or sell 1000 units.
A micro lot is suitable for those traders, who want to open a trade position with higher leverage. It is the smallest amount in the forex trading like nano lot.
Those who own the amount of $200-$500, can be traded with a micro lot.
Trading with a micro lot will give you the facility to trade without heavy leverage. This is also convenient for those traders who followed the money management rules.
At the same time, a micro account is also helpful to know the effectiveness of Forex brokers and traders.
As we all know, a micro lot is a 1/10th of the mini lot and 1/100th of the regular lot. It can be described like this that one mini lot equals to 10 micro lots and 100 micro lots equal to 1 regular lot.
Mini lot in Forex is suitable for those traders who are new in the trading business or want to start trading.
By using this lot, they try to enter into the trading market to learn how to trade. This mini lot is worth $1 (each pip value).
In the mini lot, price moves in a very small amount. Mini lot starts with the amount of $10,000 units.
Mini account or Forex mini lot is sometimes wise for large investors who do not want to invest their whole money in one trading market. This is about “Putting all eggs in one basket”.
You can trade with a mini lot if your trading account owns $2000.
It is the regular lot size in the Forex trading marketplace, where traders can trade with 1000 units in the micro lot and 10,000 units in the mini lot. In the standard lot, traders can trade with 100,000 units of the base currency.
Here, $10 changes instantly with just 1 pip movement.
It is recommended by most of the professional traders that if your account is worth $25,000 or more, then you can trade with a standard lot.
Importance Of A Smaller Lot Size
Generally speaking, Forex lot size will be offered by your preferable broker. You have to choose your lot size depending on how much money you want to invest in your trading account.
Additionally, you have to determine your ideal trading position size.
However, it is wise to start with a smaller lot size. Because small lot size will help you to survive in this trading market for a long time.
Here is the importance of trading with a smaller lot size:
- Traders who are expert in the trading field can know about the execution service of a broker in the time of the live transaction.
- Novice traders can understand their own trading abilities.
- Traders who cannot afford to trade with larger sizes.
Implementing Lot In Demo Account
A demo account could be beneficial for traders before investing the real amount in the trading marketplace.
On the other hand, there is no guarantee that after practicing with a demo account, you will able to avoid your monetary risk. Anything can happen in the Forex market.
It is true that practice through a demo account will help you to know more about trading.
Suppose, you want to trade with a larger amount after winning a few trades. In that time, if the trade falls off then the situation will discourage you to open a new position.
You can go with a bigger lot whenever you want. But, a small lot will give you the confidence to start with a bigger one.
Success in trading overall depends on the right strategy, and also the flexibility. You can consider it as a key to effective or right trading.
Forex Lot Size Calculator
Forex lot calculator is an important tool for calculating the position size without using manual formula.
Meanwhile, to determine the value, you have to enter the account currency, account size, a ratio of risk, stop loss, and current ask price.
After that, the calculator will determine your total contract size alone with the pip value, and leverage.
Besides that, this tool is available at many forex broker’s sites. It is possible to download the forex lot calculator to your mobile device from the app store.
The major advantage of this tool is that you don’t need to waste your time by entering different formula manually.
On the other hand, it is possible to calculate the forex position size by using the forex lot size formula.
Forex Lot/ Position Size = Risk Amount/ (Stop Loss X Value Per Pip)
Calculate Forex Lot Size Effectively Using Pip Value
When you are going to open a new position in the trading marketplace, you have to determine position size. Moreover, Forex lot size will help you to calculate the trading risk.
In our previous article, you already know how to calculate the value of a pip.
Let’s see, how to calculate the pip value effectively by using lot sizes.
Here, we will discuss the calculation for Micro lot and as well as for Mini Lot.
Micro Lot Calculation:
Suppose, you are trading with the currency pair of USD/EUR. Here, the base currency is USD.
So, USD/EUR = 1.5923
1 pip value (0.00001/1.5923) = $ 0.0000628
1 pip value for Forex micro lot ($ 0.0000628 x 1000) = $0.0628
Mini Lot Calculation
Suppose, you are trading with the currency pair of USD/CHF. Here, the base currency is USD.
So, USD/EUR = 1.3825
1 pip value (0.00001/1.3825) = $ 0.00007233
1 pip value for Forex mini lot ($ 0.00007233 x 10,000) = $0.7233
You can earn from each lot size if you apply your trading strategies properly.
In conclusion, we can say that selecting a proper lot size is the key to earn a profit. As we mentioned before, you can put yourself in the trading market at the risk of only 1%.
Based on the account risk and the pip risk you can determine your trading position size in lots.
Risk too little will not help to grow your account balance and over risk can also blow your account.
So, take your decision wisely.