forex basics

What is Lot Size ?

Daksh Murkute | | |

From the very beginning of our civilisations we humans have assigned certain units to everything we buy or sell. Everything from gasoline to gold is measured in certain units and you buy or sell it in those particular units.

 

Consider you go out to buy milk, how do you measure the quantity of milk you are buying? It's obvious that you will have to buy it in terms of gallon or litre? Right?

 

In the same way, when you buy or sell anything in the forex market you do that in the unit called a lot. When you first get into forex without any prior knowledge about forex trading you must have come across the word lot. And must have kept yourself wondering about what it actually means.

 

In this blogpost, I will tell you everything you need to know about lot sizes.

Contents

What is the Lot size?

Types of Lot sizes

Why does Lot size matter?

How to calculate Lot size?

Lot size calculator

 

 

Key Takeaways

i. In the forex market, currency pairs have to be bought or sold in lots. There are different types of lots sizes.
ii. Lot sizes are important for risk management.

 

 

Whenever we trade in the forex market, we need to buy or sell the currency pairs in lots. Lots are nothing but the quantity that the currency pairs need to be traded in. There are different types of lots based on how much currency pair it contains.

 

 

What is the Lot size?

In the forex market, the lot is the unit in which a trader buys or sells currency. There are different lot sizes and each lot size has a certain value assigned to it.

 

For example, if you have to buy 10000 units of any currency, you use the lot size of 0.10, And based on this you have profit and losses.

 

 

 

Types of Lot sizes

 

Types of lot sizes

 

There are 4 types of size.

 

1. Standard lot (1.0)

One standard lot size is equal to 100,000 (hundred thousand) units of any currency you are buying or selling.

 

This means that if you are opening a trade with a lot size of 1.0, you are buying 100,000 units of that currency.

 

For example, If you open a buy trade on USDJPY with 1 standard lot size. This means that you bought 100,000 units of USD.

 

In 1 standard lot, every pip gives you $10.

 

Let's assume that you bought USD-JPY at 111.000 with 1 standard lot size and the price moved to 111.500.

 

So, this means that the price moved 50 pips and so you had a profit of $500.

 

 

2. Mini lot (0.10)

One mini lot size is equal to 10,000 (ten thousand) units of the currency you are buying or selling.

 

This means that if you are opening a trade with a lot size of 0.10, you are buying 10,000 units of that currency.

 

For example, If you open a buy trade on USDJPY with 1 mini lot size (0.10). This means that you bought 10,000 units of USD.

 

Every pip with 1 mini lot size is equal to $1.

 

Let us assume that you sold USDJPY with a lot size of 0.10(mini lot). At the time you entered a sell trade the price was at 111.000 and then it went to 110.000.

 

This means that the price moved 100 pips in your favor and hence with one mini lot, you will get a profit of $100.

 

 

3. Micro lot size (0.01)

One micro-lot size is equal to 1000 (one thousand) units of the currency you are buying or selling.

 

This means that if you are opening a trade with a lot size of 0.01, you are buying 1000 units of that currency.

 

For example, If you open a buy trade on GBPJPY with 1 micro lot size (0.01). This means that you bought 1000 units of GBP.

 

Every pip with 1 micro lot size is equal to $0.10.

 

Let us assume that you sold GBPJPY with a lot size of 0.01(micro lot). At the time you entered a sell trade the price was at 143.000 and then it went to 143.500.

 

This means that the price moved 50 pips in the opposite direction and hence with one micro lot, you will get a loss of $5.

 

 

4. Nano lot size (0.001)

Although very few brokers allow you to trade with nano lot sizes, it can be very useful if you are a beginner and want to start live forex trading with a very small initial investment.

 

One nano lot size is equal to 100 units of the currency you are buying or selling. This means that if you are opening a trade with a lot size of 0.001, you are buying 100 units of that currency.

 

For example, If you open a buy trade on GBPJPY with 1 nano lot size (0.001). This means that you bought 100 units of GBP.

 

Every pip with 1 nano lot size is equal to $0.01.

 

Let us assume that you bought GBPJPY with a lot size of 0.001(nano lot). At the time you entered a buy trade the price was at 143.000 and then it went to 143.500.

 

This means that the price moved 50 pips in your favor and hence with one nano lot, you will get a profit of $0.50.

 

 

Why does Lot size matter?

You cannot win in forex without a proper risk management plan. A trader should always be aware of the risk involved in a trade and also the amount of risk he can take based on the account.

 

Using larger lot sizes on small accounts often leads to overleveraging of your account and doing this can wipe your account within the blink of an eye.

 

So, a trader needs to know the proper use of lot size so that he can manage the risk effectively.

 

 

 

How to calculate Lot size?

You have to calculate the lot size of your trade based on risk management, the potential risk in the opportunity and other factors.

 

For example, the ideal risk management for a forex trader is to risk only 3% of the account per trade.

 

So, let's assume you have an account of $1000. You got an opportunity that has a risk of 30 pips. So based on the above information the lot size you can use is 0.10.

 

Calculation 

3% of $1000 = $30

30 pips @0.10 = $30

 

So, you can use a lot size of 0.10 on this trade as by using a mini lot you are risking only 3% of your account per trade.

 

Lot size calculator

 

Lot size calculator

Lot size calculator is a tool that helps you to calculate a proper lot size concerning a proper risk management plan and hence helps to keep your account safe from blowing out.

 

All you need is few data to put in the tool and it will help you calculate the lot size effectively.

 

The data you will require for calculating lot size -

1. Account balance

2. Risk percentage of your account

3. Risk on the opportunity (stop loss)

 

Below are the links to the lot size calculator

BABY PIPS LOT SIZE CALCULATOR

MY FX BOOK LOT SIZE CALCULATOR

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