Forex lot size explained

Forex lot size explained, a simple guide for beginners

The forex market is one of the largest and most liquid markets in the world, so trading in it can be very profitable for investors. The amount of money that can be made trading in this market is determined by a trader’s skill level, experience, and knowledge. Knowing what Forex lots are is essential for any trader. Lot in Forex is a unit of measure for position volume, a fixed amount of the base currency in the Forex market. The trading volume is stated in lots, and the size of lots directly affects the risk level. Naturally, the greater the volume of one lot in Forex gets, the greater the risk becomes. In this article, you will learn about lots, lot sizes, standard Forex lots, and how you can use them to manage your risk while trading?

What is a lot in Forex trading?

Forex is traded in specific amounts known as lots. It’s basically the number of currency units you’re buying or selling.

Therefore, simply, a “lot” is a unit of measuring transaction amounts.

In other words, when you’re placing an order on a trading platform, the order is placed in a size known as a lot.

Lot is like a box of chocolates! When you buy chocolate, you usually buy a box, and the box includes 12 pieces of tasty chocolate. Now imagine the box of chocolate you bought is known as a lot, and a lot is defined by the number of chocolate pieces inside the box.

How much is one lot?

In Forex, you can only open positions in specific volumes of trading units known as lots. You cannot buy, for instance, 1,000 euros exactly; you can buy one lot, two lots, or 0.01 lots, etc. 

As we just mentioned, a “lot” is a word used to define the contract size for a trading asset. 

Lot is the transaction size, the volume of the trading asset which a trader could buy or sell. Lots are also used in trading other asset classes like oil or stocks.Forex lot sizes explained

A forex lot size refers to the total number of currency units that an investor has invested in a particular trade. It is the number of units multiplied by the unit price.

 

What is a standard lot in Forex?

The standard lot in Forex is the most popular trading lot size. The standard size for a lot is 100,000 units of currency.

Historically, Forex has only been traded in specific lots of 100, 1,000, 10,000, or 100,000 units. More recently, however, non-standard lot sizes are also available to Forex traders.

With the dawn of online brokers and in light of increased competition, retail investors can make trades in amounts that aren’t a standard lot, mini-lot, or micro-lot. 

What is a mini lot in Forex?

A mini lot in Forex is a small trade size. It is the smallest trade size that a trader can place, and it typically ranges from 100 to 1,000 units of currency. 

Mini lots are popular among beginners of the Forex market that are learning how to trade. Since price movements in mini lots have a much smaller impact on profits and losses, the volatility on open positions is lesser. Simply put, you don’t need as much capital in your accounts. 

New traders are able to start with as little as $100 with a mini account rather than having to fund $1,000 or $10,000 into a standard account.

We highly recommend starting with a demo account and then graduating to a mini account.

Expert traders may also use mini lots to control their positions better. Algorithmic traders may also use mini lots to fine-tune their strategies to maximize profitability at minimal risk levels.

What is a micro lot in Forex?

The micro lot is a type of forex trade smaller than the standard lot size. The micro lot is typically 1% of the standard lot size, which means it is worth 100 times less than the standard lot. 

Traders who use micro lots are looking to make small profits or prevent losses.

Trading in micro-lots does is not necessarily restricting. You can trade as small or as large as you want. You can trade one micro lot or trade 1,000 micro-lots, which is equivalent to 1,000,000 units (10 standard lots) of currency. 

While somewhat rare, some Forex brokers also offer nano lots, which are 100 units of the base currency.

What is a nano lot in Forex?

A nano lot is a unit of forex trading, which is equal to 1 million units of the base currency. It’s the smallest lot size available for trading forex.

Nano lots are one-tenth of a micro lot and one-hundredth of a mini lot, or 100 units of a base currency. 

Micro lots vs. nano lots in Forex

A micro lot is 0.1 or 1% of the lot size, and a nano lot is 0.01 or 0.1% of the lot size in forex trading.

Maximum lot size in Forex

Regardless of what type of lot you’re using or have defined in your account’s trading conditions, there is always a minimum and maximum value. You can find out the maximum lot size in the contract specification in, for example, in MT4 or MT5.

How should you calculate the lot size when trading Forex?

When trading Forex, lot size is an important consideration. Once more, it refers to the number of units traded in a single transaction. 

A lot size can be as small as 100 units or as large as 100,000 units.

In order to calculate the lot size, you need to determine how much you are willing to risk on a trade.

There are different methods for calculating the lot size, but they all have pros and cons. One method would be to take your account balance and divide it by 100. That will give you a rough estimate of how much money you should risk on a trade.

The calculation for determining the lot size is based on two factors:

1- The total amount of money you want to trade

2- The risk level you are comfortable with

Remember, you are calculating lot size to manage your risk. So at its core, lot size calculation is a part of your risk and asset management strategy.

Determining your risk and asset management strategy

We’ve talked about your personality type and your trading behavior in our blog a lot. You probably know if you are an aggressive or conservative trader by now, but if you don’t, we highly recommend you test yourself with a demo account. 

Your risk management strategy

A good asset management strategy will help you answer three questions:

How much risk are you willing to take?

What losses are acceptable according to your profit targets? 

The bigger is the risk; the greater is the potential profit. Contrarily, the amount of potential loss also increases. 

Nobody will give you an exact number for the amount of risk you should take, and your answer to this question comes from your unique strategy and the balance of conservative and aggressive approaches you choose.

What volume of the transaction must be to comply with the rules of the risk management system? 

Risk management rules come from mathematical probabilities and progressions. You can calculate the transaction volume based on the average and current volatility of the pair, your deposit amount, and your chosen leverage that determines how much money your broker is going to block.

What is the level of acceptable loss, and where should you place your stop-loss?

Based on the volume of the position and the value of the point, you can estimate the level of volatility and determine where to put the stop-loss point.

Seems too complicated? Well, there are also lot size calculators that you can use.

Almost all trader’s calculators have the same problem: you cannot calculate the lot volume with regard to your risk level, although this is precisely the point of planning trading volumes. 

Formula to calculate lot volumes

We suggest that you use the following formula to calculate the lot concerning your risk level manually:

Lot volume = (% risk * deposit) / X * (Рrice 1 – Рice 2)

– % Risk: The amount of the deposit you want to allocate for the trade (Some traders recommend %5 of your asset should be your maximum risk).

– Deposit: Your total deposit size

– X: is a coefficient factor. It is equal to 1 for long positions and -1 for short positions. 

– Price 1: The opening price, or the starting price of your trade

– Price 2: Your stop loss point.

Pro tip: If you’re a beginner, set your risk levels at %1. It might sound too conservative to you, but remember, when using an x100 leverage, you’re basically risking your entire lot!

Formula to calculate lot volumes

We suggest that you use the following formula to calculate the lot concerning your risk level manually:

Lot volume = (% risk * deposit) / X * (Рrice 1 – Рice 2)

– % Risk: The amount of the deposit you want to allocate for the trade (Some traders recommend %5 of your asset should be your maximum risk).

– Deposit: Your total deposit size

– X: is a coefficient factor. It is equal to 1 for long positions and -1 for short positions. 

– Price 1: The opening price, or the starting price of your trade

– Price 2: Your stop loss point.

Pro tip: If you’re a beginner, set your risk levels at %1. It might sound too conservative to you, but remember, when using an x100 leverage, you’re basically risking your entire lot!

How to choose the correct lot size in Forex?

If these concepts seem baffling to you, let us assure you that it’s not easy. Choosing the correct lot size is one of the most complex decisions you need to make when trading forex. It is not easy to find out what size suits your strategy and your account balance.

But there are some guidelines you can follow to optimize your trading strategy.

Here’s a recap of these strategies:

1- Figure out how much money you have in your account

2- Define your risk (something less than 5%, hopefully!)

3- Choose a currency pair with your desired leverage (high leverage is suitable in Forex)

4- Use the formula we just thought you! 

Lot volume = (% risk * deposit) / X * (Opening Price – Stop-loss Price)

Using a strategy like this will help to ensure that your trading account can bounce back if you suffer losses.

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Forex lots summed up

The forex market is one of the largest and most liquid markets in the world. In Forex, you can only open positions in specific volumes of trading units known as lots. Lot in Forex is a unit of measure for position volume, a fixed amount of the base currency in the Forex market. 

The trading volume is stated in lots, and the size of lots directly affects the risk level.

The standard lot in Forex is the most popular trading lot size. The standard size for a lot is 100,000 units of currency.

Historically, Forex has only been traded in specific lots of 100, 1,000, 10,000, or 100,000 units. More recently, however, non-standard lot sizes are also available to Forex traders.

There are different methods for calculating the lot size, but they all have pros and cons. One method would be to take your account balance and divide it by 100. That will give you a rough estimate of how much money you should risk on a trade.

Using a risk management strategy will help to ensure that your trading account is able to bounce back if you suffer losses.