Discussion Topic: Forex Lot Sizes
In the previous article you have learned about Pip and Pipette in forex trading. In this article, you will learn what is a Lot in Forex? What are the lot sizes in forex trading? How to choose the best forex lot size for trading? And how to calculate your total profit/loss using lot sizes?
What is a Lot in Forex Trading?
In the past and even presently in MT4, spot forex is traded in specific amounts called lots. A lot in forex trading is basically the pre-defined number of currency units you will buy or sell when entering a trade.
Here is a list of different forex lot sizes you will encounter in your trading career.
Forex Standard Lot = 100,000 (100K) units of base currency.
Forex Mini Lot = 10,000 (10K) units of base currency
Forex Micro Lot = 1,000 (1K) units of base currency
Forex Nano Lot = 100 units of base currency
Below table shows some more detail about forex lot size:
|LOT NAME||NUMBER OF UNITS||MT4 NOTATION||PIP VALUE $|
We hope that from above you have got an overview of what is a lot size in forex trading. Now its time to dig down a bit into the different lot sizes to know their currency value.
Forex Standard Lot:
The size of a standard lot in forex trading means 100k units of your account currency. That's a $100,000 trade if you are trading in dollars.
If you have a dollar-based account, then the average pip value of a forex standard lot is approximately $10 per pip. That means if you are trading a standard lot, then a 10 pip movement in the market will give you a $100 profit/loss depending on the direction of movement.
It is recommended to trade in forex standard lot size only if you have $25,000 or more in your trading account.
Forex Mini Lot:
The size of a Mini Lot in forex trading is 10,000 units (10K units) of your account's currency. If you have a dollar-based account, then the average pip value of a forex mini lot would be approximately $1 per pip.
I know $1 per pip looks like a small amount, but sometimes forex market can move over 100 pips in a day, which in turn would be a profit/loss of more than $100 within few hours.
For trading in forex mini lot size, the recommended account value which you should have is at least $2000. If you are a beginner then we'll advise you to avoid ordering mini lots while trading.
Forex Micro Lot:
Before the nano lot came into the picture (before a few years), micro lots were the smallest lot size a forex broker used to offer.
The size of a Micro Lot in forex trading is 1000 units (1K units) of your account's currency. If you have a dollar-based account, then the average pip value of a forex micro lot is approximately 10 cents per pip.
If you are a beginner and serious about live trading, then it is highly recommended to trade forex only in micro lots.
The recommended account value for trading in forex micro lot size is in between $200 to $500, depending on how many pairs you would trade. You may also make use of the leverage to trade more. [See Also: What is Leverage? and How to properly Use it?]
Forex Nano Lot:
The Nano Lot in forex trading is the smallest forex lot a broker can offer in today’s market. But be noted that not all forex brokers offer to trade in forex nano lots. Most of the brokers offer up to forex micro lot only.
The value of forex nano lot is 100 units of your account's currency. If you have a dollar-based account, then the average pip value of a forex nano lot is approximately 1 cent per pip.
You may start this type of account with as low as $25 only. Trading in the forex nano lot size is recommended only if you are going to test some new strategy in the live market. [Instead, we’d suggest using a demo account].
How to Calculate Effective Pip Value using Forex Lot Size:
In forex trading, It is very important to note that lot sizes directly affects the risk you are taking. Hence, finding a suitable forex lot size for your trade can help you lock down the amount of risk you would be taking.
We already learn about how to calculate the value of 1 pip [Refer: Calculating 1 pip value]. Now we will discuss on how to calculate the total pip movement value using the lot size.
For our examples shown below, let’s assume we will be using the standard lot size (100,000 units) and the micro lot size (1000 units). We will now calculate some trade examples to see how it affects the pip value.
If USD is base currency:
USD/CHF = 1.3825
1 Pip value: (0.0001 / 1.3825) = $0.00007233
1 pip value for forex standard lot size: $0.00007233 x 100000 units = $7.23
1 pip value for forex micro lot size: $0.00007233 x 1000 units = $0.0723
1 Pip value: (0.01 / 111.36) = $0.0000897
1 pip value for forex standard lot size: $0.0000897 x 100000 units = $8.97
1 pip value for forex micro lot size: $0.0000897 x 1000 units = $0.0897
If USD is not the base currency:
1 Pip value: (0.0001 / 1.1758) = 0.00008504 EURO
1 pip value for forex standard lot size: 0.00008504 x 100000 = 8.50 EURO
1 pip value for forex micro lot size: 0.00008504 x 1000 = 0.0850 EURO
1 pip value in USD for standard lot would be 8.50 EUR x 1.1758 = $9.99
1 pip value in USD for micro lot would be 0.0850 EUR x 1.1758 = $0.0999
As seen above, forex lot size directly impacts your account in a proportion of how much the forex market moves. A 50 pip movement on a smaller lot size will have much less effect than a fifty pip move on a higher lot size.
Forex Lot - The Conclusion:
Most retail forex traders only trade in forex mini lots or forex micro lots. It might not sound very attractive, but practically, keeping your lot size small will help you to survive long term.
In our opinion, the forex mini and micro lots are the perfect balance between capital requirement and risk-taking. Using higher lot size for forex trading, with a lower capital in the trading account may end up as a disaster.
If you are a beginner, our suggestion is to trade mostly in forex micro lot size, and probably in forex mini lot size as the confidence grows. Also, be sue to maintain adequate balance in the trading account and use proper stop loss & target.
We hope that you have enjoyed the above article explaining the lot Size in forex trading. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts related to forex lot sizes and in calculating the lot value. Also, let us know in which lot size you trade most.