What is Lot Size? Understanding lot sizes in forex

Everything is simple. A lot is just some currency units. To know the size of a lot, you should understand that one standard lot equals 100 000 base or account currency units.

Alongside a standard lot, there are two more types – mini and micro. A mini lot equals 10 000 units when micro – 1,000 units. Before opening a trade, you have to decide the number of money you can spend.

Let’s start with an example that everyone can relate to. When you buy eggs in the grocery shop, it is impossible to buy just one egg, isn’t it? Eggs are sold in a set of 12 or more. Now, back to FOREX world!

Major takeaways

  • In Forex, a lot is a standard unit for measuring the volume of a currency position opened by a trader, which directly impacts risk level.
  • One standard lot is typically 100,000 currency units of account base currency. There are smaller lot sizes, including mini (0.1 of a standard lot or 10,000 units), micro (0.01 of a standard lot or 1,000 units), and nano (0.001 of a standard lot or 100 units).
  • Using smaller lot sizes depends on traders’ risk management strategy and account type. For example, cent accounts allow for nano lot trades but with proportionally smaller profits.
  • Brokers can provide different lot sizes, which helps reduce the minimum deposit amount even without using leverage.
  • The concept of a lot extends beyond currency to other trading assets, such as oil. Traders must be aware of their broker’s specifications and leverage rules when deciding on their position size.

One standard lot in the Forex market amounts to 1,000,000 (one million) units of the base currency. For example, if we are talking about EURUSD, in a purchase transaction, 1,000,000 (one million) euro will be purchased for the respective amount of US dollars. So, at the purchase price of 1.38997, 1,389,970 US dollars will be required to purchase one million Euros.

Several lots form together a total trade amount. For example, 10 lots is the amount equivalent to 10,000,000 (10 million) items of the currency we need to buy. Brokerage companies also provide an opportunity to operate with fractional (mini- and micro-lots). In particular, the LiteForex Company considers 100,000 as a standard lot and allows traders to open a transaction of 0.1 lots (10,000 units) and 0.01 lots (1,000 units).

Let’s say there is a quote for USD/CAD at the exchange rate of 1.4850. You probably wonder if it is possible to buy 1USD or 12USD … In fact you probably think that you can buy any “quantity” of USD. The answer is NO, you cannot simply buy any “quantity” of a currency. Similar to a pack of eggs, trading currency in FOREX is done in lots.

Standard lot size is USD $100,000

Mini lot size is USD $10,000 

Micro lot size is USD $1,000

You can buy as many lots as you want – one, two, or a hundred. One lots means you are buying USD $100,000. Two lots means you are buying USD $200,000 and so on and so forth. There are of course FOREX brokers that offer smaller lots.  What are such large amounts for? Currencies are measured in pips (the smallest increment of that currency). To observe any major profit or loss, large amounts of a currency must be traded. 

Choosing a lot size in forex

How to choose the right lot size in forex is an important decision and it can affect returns and risk management. Traders should look at their account size, and knowledge of the market along with other factors, including:

  • Risk tolerance. Risk tolerance is an important factor to consider. Traders who are more risk-averse may prefer to trade with smaller lot sizes to limit their exposure to the market, while other traders may be comfortable taking on larger positions.
  • Trading strategy. Your trading strategy can also influence your lot size. For example, a day trading strategy that involves taking up a position and closing it within one day may require the use of a smaller lot size to manage risk.
  • Market conditions. Market conditions, such as volatility and liquidity, can also affect your lot size. In volatile markets, traders may need to use smaller lot sizes to manage risk, while in more liquid markets they may be able to take on larger positions.
  • Trading platform. The platform traders use could also limit the lot sizes available to you. Some platforms may only allow trading in standard or mini lots, while others may offer micro or even nano lots.

Why should you accurately calculate the lot size:

  • To optimize the position volume in relation to the deposit amount, considering the risk percentage and the expected profit. I will help you develop a balanced trading system.
  • To select the right position size and the system of the deposit increasing so that the total Forex trading position will be resilient to drawdowns, price corrections, pullbacks, and volatility (valid number stop loss level).

Remember, the leverage size does not affect the risk percentage if there is a clearly defined target for the position volume. With the same position size, the change in leverage affects only the amount of the collateral.

You should also note whether a direct or an indirect quote when calculating the pip. For example, the pip price in the EURUSD pair is 10 USD in the Forex currency pair standard lot. In the USDJPY pair, the pip price will already be 9 USD. The lot calculation formula will be is like this: (1 point *lot size)/market price.

Next, I will explain examples and formulas for calculating a position size in USD for different types of assets.

The currency value depends on that base currency of the pair you trade. Clearly, a smaller lot means a lower cost for one pip movement.

As a forex trader, you have to Review your options and look for the most efficient way to limit the risks. Many strategies are created focused on risk management and money management techniques. Different lot size mean different risks. This is yet another example of how to trade safely.

Conclusion

It’s crucial to understand lots and pips if you want to trade Forex effectively. Here’s what you learned today:

  • A Forex lot is a unit of measurement that determines how many units of the currency you will buy.
  • There are four lot types in Forex: nano, micro, mini, and standard
  • Pips are the last decimal place of the quoted value, which is how profits are calculated for lot size.

Understanding these things will help you trade Forex well, but you must also know how much risk you’re willing to take.

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