Table of Contents
What is a Lot Size?
Lot Size – Generally, a lot is a group of goods or services that make up a transaction. In the financial markets, it represents much of the standard amount of a financial instrument established by the relevant regulatory bodies.
A lot may represent the minimum amount of a security that can be traded for publicly traded securities.
Thus, the stock market is the number of shares bought. In the options market, the number of contracts that appear in the value of derivatives or Forex represents the number of currencies bought/sold.
The lot concept allows the financial markets to standardize quotes. For example, stock options have a standard contract price for the right to buy or hold 100 shares. With this standardization, the investor knows how many units. And also believes in each contract and quickly pays the price per unit.
A Lot Size in Forex
In the forex market, represents the amount of currency bought or sold in a single transaction, and the transaction size is measured in lots. Can be distinguished:
Lot: A standard in the forex market is 100,000 units. Therefore, buying the EUR/USD currency pair with a volume of 2 lots indicates that you purchased 200 thousand euros.
Mini Lot: A mini is 10,000 currency units. Equivalent to 0.1 lot.
Micro Lot: A micro is one thousand currency units. Equivalent to 0.01 lot.
Some brokers and traders offer accounts in different denominations. For example, one broker may offer mini trading accounts, where one contract represents 10,000 units, while other brokers, even with smaller budgets, continue to use the standard terminology.
What is Too Much in Forex?
In Forex, a “lot” determines the size of a transaction or the number of currency units that can be bought/sold in a trade. A usual lot is 100,000 units of the base currency.
Most brokers allow you to trade with partial sizes, less than 0.01 and sometimes even lower. Fractional sizes are categorized into the mini (0.10), a micro lot (0.01) and a nano (0.001). Please mention the image above to compare contracts and related currency units.
The Importance of the Point Value to the Lot Size
Lot sizes are significant because they directly impact and show how much risk a forex trader is taking. Market volatility affects a trader’s trading account, and the lot size determines the size of this effect. For example, a movement of 100 pips in a minor trade will not have the same effect as a movement of 100 pips in a large business.
So, after understanding the lot size, we need to focus on calculating the pip value to determine our forex trading profit or loss.
Lot Size – Calculate Point Values
A point is a unit of measure indicating the value change between two currencies. Usually, this is the last decimal place for the price of a currency pair. For example, if the EUR/USD moves from 1.1075 to 1.1077, this is a two-pip movement.
- It is a relatively small percentage of a unit of currency value.
- The effect of a change in the pip price on your profits and losses depends on the currency pair you are trading and the currency you fund in your trading account.
- Usually, your forex broker or trading platform performs the necessary calculations for you. However, it is a valuable method to get to know them.
- The value of one pip can be calculated by dividing 1/10,000 or 0.0001 by the exchange rate. And also known as the current value of the currency pair. Then multiply that number by your size, the number of base units you are trading.
- For example, if GBP/USD is currently trading at an exchange rate of 1.2400 and is trading with a specific contract size, then the pip value will be respectively:
- Standard Lot 100,000 units: The pip value calculates as (0.0001 / 1.2400) x 100,000 = 8.0645. It means you will make a profit or a loss for each pip move of £8.0645.
- Mini Lot (10,000 units) – The pip value is 0.6667 (0.0001 / 1.2400) x 10000, which means that one pip movement will be zero profit or loss, 6667 GBP.
- Micro Lot (1000 units): The pip value is 0.0806 (0.0001 / 1.2400) x 1000, which means that one pip movement will be zero profit or loss, 0806 GBP.
- Nano Lots (100 units): The pip value is 0.0081 (0.0001 / 1.2400) x 100, which indicates a profit or loss of £0.081 per 1 pip movement.
- Due to changes in exchange rates, the value of one pip will vary between currency pairs.
- However, if the US dollar is the quote currency, that is, the second currency in the currency pair, then the value of one pip is always the same, for example:
- $10 for a standard of 100,000 units of one currency.
- 1 USD for a mini of 10,000 currency units.
- $0.10 for a micro of 1000 units of one coin.
- 0.01 USD per nano, or 100 coin units.
How are Forex Lot Size Calculated?
A lot is a unit of measurement of position quantity, which is a fixed amount of the base currency in the foreign exchange (forex) market. Volume is always represent in lots, and the Lot’s size directly affects the risk level. The larger the importance of the forex lot, the higher the risk.
It includes a model that allows you to calculate the optimal amount of standard lots in the forex markets based on the estimated risk level, volatility (stop loss level) and leverage effect.
Generally, standard unit for measuring the amount of a currency position a trader opens. That is to say, it is the amount a trader invests by buying a currency to resell later at a better price.
It counting is one of the main components of a risk management system recommend for those who trade in a balanced and structure manner.
In Forex, positions can only be opened within a certain amount of trading units called lots. A trader cannot buy, for example, precisely 1000 EUR, can purchase one Lot, two lots or 0.01 lots, etc.
The standard in Forex is 100,000 units of the base currency. For example, if the EUR/USD rate is equal to 1.0545, a position with a volume of 1 lot will be opened for 105,450 units of the base currency, which is the number of US dollars needed to buy 100 000 euros.
As far as currency pairs, including the US dollar ( EUR/USD, USD/CHF, GBP/USD…), are concerned, let’s take the most popular example of all, the EUR/USD pair:
- 1 lot = 100,000 units of account currency (if your account is in Euros, 1 lot = €100,000)
- 1 mini lot (0.1 lot) = 10,000 units of account currency
- 1 micro lot (0.01 lot) = 1,000 units of account currency
- 1 nano lot (0.001 lot) = 100 units of account currency
A lot is a unit of value that measures transaction volume and is often the size of a financial contract. In other words, depending on the number of lots you want to trade, the amount invested will be more or less. The higher the number of lots, the higher the amount invested and vice versa.
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