forex basics

What is Lot? Types of Lot Sizes

From the beginning of our civilization, we humans have assigned certain units to everything we buy or sell. Everything from gasoline to gold is measured in a certain unit and we buy or sell them in those particular units. Consider you go out to buy milk, how do you measure the quantity of milk you are buying? It is obvious, you will have to buy it in terms of gallons or litres.

 

In the same way, when you buy and sell anything in the forex market, you do that in a unit called a lot. In this blogpost we will discuss everything about Lots in forex.

Contents

What is lot size?

Types of lot sizes

How to choose the perfect lot size in forex?

 

What is lot size?

In the forex market lot is a unit in which traders buy and sell currencies. There are different lot sizes and each lot size has a certain value assigned to it. A particular quantity is assigned to each lot and, when you buy/sell using lot you buy that particular quantity. For example, if you have to buy 10000 units of any currency you have to use the mini lot size(0.10), and based on this you have profit and losses.

 

 

Types of lot sizes

1. Standard lot

1 standard lot size is equal to 100,000 units of any currency you are buying or selling. And one standard lot size is denoted by 1.0 So, if you open a trade with a lot size of 1.0, it means you are buying 100,000 units.

 

For example, if you opened a buy trade on USD/JPY with a lot size of 1.0 that means you bought 100,000 units of USD. Now, When you use one standard lot size, every pip is equal to $10. This means if you opened a buy trade with one standard lot size and you had a profit of 100 pips on that trade. Here, you will have a total profit of $1000. As with 1 standard lot size, 1 pip is equal to $10.

 

2. Mini lot

1 mini lot size is equal to 10,000 units of currency you are buying or selling. This means that if you are opening trade with a lot size of 0.10 then you are buying/selling 10,000 units of that currency. For, example, if you open a buy trade on USD/JPY with 1 mini lot, this means that you have bought 10,000 units of USD.

 

1 mini lot is denoted by 0.10 and here 1 pip is equal to 1 dollar. So, this means if you opened a buy trade with one mini lot size and you had a profit of 100 pips on that trade. Here, you will have a total profit of $100. As with 1 mini lot size, 1 pip is equal to $1.

 

3. Micro lot

1 micro lot size is equal to 1000 units of currency you are buying or selling. This means that if you are opening trade with a lot size of 0.01 then you are buying/selling 1000 units of that currency. For, example, if you open a buy trade on USD/JPY with 1 micro lot, this means that you have bought 1000 units of USD.

 

1 micro lot is denoted by 0.01 and here 1 pip is equal to 0.10 dollars. So, this means if you opened a buy trade with one micro lot size and you had a profit of 100 pips on that trade. Here, you will have a total profit of $10. As with 1 mini lot size, 1 pip is equal to $0.10.

 

4. Nano lot

1 nano lot size is equal to 100 units of currency you are buying or selling. This means that if you are opening trade with a lot size of 0.001 then you are buying/selling 100 units of that currency. For, example, if you open a buy trade on USD/JPY with 1 nano lot, this means that you have bought 100 units of USD.

 

1 nano lot is denoted by 0.001 and here 1 pip is equal to 0.01$. So, this means if you opened a buy trade with one nano lot size and you had a profit of 100 pips on that trade. Here, you will have a total profit of $1. As with 1 mini lot size, 1 pip is equal to $0.01.

 

How to choose the perfect lot size in forex?

Which lot size should you choose? Many of you may have this question of which lot size should you choose. It is very important to understand the art of choosing the perfect lot size. The lot size shouldn't be too small or too big and neither should it be constant. Many of you may have seen people assigning different lot size to different accounts based on the size of the account.

 

Well, that's not how you choose a lot sizes. To choose a proper lot size, you need two things before entering the trade, the amount of risk on a particular trade and the percentage of account you are willing to risk. Based on these two important things you can calculate the perfect lot size.

 

Example 1, let us consider you have an account of $1000 now if you risk 3% of your account on a single trade, and in a particular trade, you have a risk of 30 pips. Then 3% of $1000 is equal to $30. So, based on the risk of 30 pips you can use a lot size of 0.10, as even if the price goes in a loss of 30 pips you will still have a loss of $30 which is just 3% of your account.

 

Example2, this time let us consider you have an account of $2000 now if you risk 3% of your account on a single trade, and in a particular trade, you have a risk of 30 pips. Then 3% of $2000 is equal to $60. So, based on the risk of 30 pips you can use a lot size of 0.20, as even if the price goes in a loss of 30 pips you will still have a loss of $60 which is just 3% of your account.

 

It is very important to know that whenever you choose a lot size make sure you think in terms of possibilities and understand that the market is full of opportunities. Be open-minded enough to understand that a particular trade you are getting into can be a winner as well as a loser and never use a lot size which will make you lose all of your accounts on a single trade.

 

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