This week I thought I would try and give an easy to understand explanation of lot sizes in Forex. Having now worked with a few beginners, I realised that there is definitely a need for an explanation about what- (and in this case, how much) exactly it is that you are trading when you enter a trade. It is also vital for everyone to remember that your lot size directly influences the risk you’re taking when trading and blindly putting on trades could have severe consequences.
When you put in a trade on your trading platform you are putting in an order for a certain amount of quantity of a currency. These quantities are called ‘lots’ in Forex.
What Are Lot Sizes in Forex?
A ‘lot’ in Forex trading is thus the size of a trade, or the amount that is traded at any given time. Lots are also offered to traders in predetermined sizes. In very simple terms it’s kind of like going to the bakery and having the choice between 6, 12 or 18 rolls.
If you have a MT4 terminal your lot size is depicted as ‘Volume’, but it can also sometimes be shown as units.
Even though there are indicators, specialised calculators and programs that do the calculations for you, it is still important to know and understand the basics about lot sizes. There are three main types of lot sizes;
Micro Lots:
A micro lot is a lot of 1,000 units of your account funded currency. If your account is funded in U.S. dollars, this means that a micro lot is worth $1,000 of the base currency you are trading. If you are trading a dollar-based pair, 1 pip would be equal to 10 cents. (Remember that the base currency is the first currency in a pair, so with EUR/USD, the Euro would be the base currency and the dollar the quote currency).
Mini Lots
A mini lot is 10,000 units of your account funded currency. If you are using a dollar-based account and trading a dollar-based pair, each pip in your trade would be worth around $1.00
Standard Lots
A standard lot is a 100,000-unit lot. If you are trading with this size of position it means that each pip is worth $10. Your account will thus fluctuate by $10 for each, one pip move.
SO hopefully uou now understand
What Are Lot Sizes in Forex?
Summary:
Lot size
Units
Volume
$ per pip
Standard
100,000
1
$10 per pip
Mini
10,000
0.1
$1 per pip
Micro
1,000
0.01
10 cents per pip
Let’s take a look at an example of what your profit (or loss) would be if you bought EUR/USD at 1.3210 and then closed your position, or took profit, at 1.3225
Number of difference in pips = 15
Value per Pip = $10
Lot size = 1 (standard lot)
Your profit would be = 15 x $10 x 1 = $150
Now imagine you had a $1000 dollar account, were trading with 1 standard lot size, but the trade went against you… You bought EUR/USD at 1.3210 and got stopped out at 1.3200
Number of difference in pips = – 10
Value per Pip = $10
Lot size = 1 (standard lot)
Your profit would be = -10 x $10 x 1 = – $100
So that would be 10% of your total account size! If you were aiming to trade a funded account you would be down more than double your allotted drawdown percentage.
Understanding and planning around the risk you are taking when putting on a trade is a key component to becoming a successful trader. I hope this simple explanation helps a little bit and that you now have a clearer understanding of lots. If anybody has any questions, lease feel free to email me.
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