What Is a Lot in Forex
What Is Lots Size In Forex
Last Updated on August 23, 2021 by Alphaex Capital
What is lots size in forex
Believe it or not but most beginners that start trading real money don't even grasp this concept.
Yet one small decimal place mistake can have grave consequences.
That is why it is important to understand what is lots size in forex trading for beginners, to avoid careless mistakes and protect your capital!
In this article, we are going to break down the question "what is lots size in forex" and help you understand this fundamental concept when trading forex.
After reading this article you should understand what is lots size in forex now and hopefully avoid the careless pitfalls many traders make by inputting too much or too little lot sizes.
So, if you are just a beginner and this is the first time you are reading about what is a lots size in forex or someone who struggles to remember, then this article should be perfect for you.
What Are Lots In Forex?
So, what are lots in forex?
Lots are the number of currency units you want to trade.
It has been used because previously, spot forex was only traded in specific amounts – hence the name lots.
Back in the past, when trading required larger capital to trade with, lots were used to standardise the units.
For example, the standard lot size is 100,000 units of a currency value.
So, if you wanted to trade 1 lot of the EUR/USD this would be €100,000 euros worth.
Echoing the above, back in the past by trading 1 lot would generate a return based on the pip value (which is also extremely important to understand about).
Whereas nowadays we have leverage, which allows the broker to loan you the difference based on the margin you put up.
With leveraged trading opened up the world to different lot sizes, because nowadays you can start with $100 easily and start trading.
This introduced 3 new types:
- Mini Lot
- Micro Lot
- Nano Lot
Mini lots – this is the name given to currency deal sizes in the tens-of-thousands – so 1 mini lot = 10,000 units; 2 mini-lots = 20,000 units, etc.
Micro lots – this is the name given to currency deal sizes in the thousands – so 1 micro lot = 1,000 units; 2 micro-lots = 2,000 units, etc.
Nano lots – this is the name given to currency deal sizes in the hundreds – so 1 nano lot = 100 units; 2 nano-lots = 200 units, etc.
You can see the difference between the lot sizes in forex in the image below:
How to calculate lots in forex
This is the beauty of standardisation; you don't need to learn how to calculate lots in forex at all.
However, if you really must then you can use this formula
Value of Lot * 100,000 = How many lots.
1 lot * 100,000 = 100,000 units
2 mini lots (0.2) * 100,000 = 20,000 units
5 nano lots (0.005) * 100,000 = 500 units
Fairly straight forward, but every broker will do this for you automatically.
All you need to know is how much you want to trade.
You do however need to understand the value of the pip, based on the lot size.
To do that you simply follow this formula:
(value of pip/current rate) * lot size.
So, if you wanted to trade the EUR/USD, you would apply the formula like this:
Most currencies value of pip is 0.0001, with a couple of exceptions, so let's go through a quick example of a 0.0001 value
(value of pip = 4 places behind decimal place/1.1660) * 1 lot (100,000 units)
(0.0001*1.1660) * 100,000 = $11.66 per pip.
So if the market moves 10 pips in your favour, you will be $116.60 in profit.
Or to make it so it's a mini lot you change the 100,000 to 10,000 units (mini=10,000).
(value of pip = 4 places behind decimal place/1.1660) * 1 mini-lot (10,000 units)
(0.0001*1.1660) * 10,000 = $1.16 per pip.
This can be replicated all the way down to the nano-lot.
To make it easier to understand, because it can be complex, let's do it again but for a different pair.
This time USD/JPY.
The USD/JPY pip value is 0.01 – this is where we look to see how many pips the currency pair has moved.
So, let's input the formula below:
(value of pip = 2 places behind decimal place/121.90) * 1 lot (100,000 units)
(0.01*121.90) * 100,000 = $8.20 per pip.
Does this make sense now?
How much is 0.01 lot in forex
0.0 1 is a micro lot in forex which is 1,000 units of currency.
The value of the pip for a micro-lot is roughly $0.10 based on the EUR/USD.
This is usually the value most beginner traders start with. It is enough for you to risk some capital, but not enough for you to panic when the market goes against you.
In fact, we recommend that traders move on to this trading size and away from a demo account as soon as they are comfortable.
How much is 0.1 lot in forex
0.1 is a mini lot in forex which is 10,000 units of currency.
The value of the pip for a mini lot is roughly $1based on the EUR/USD.
Traders that use mini lots are now more adapted to the markets and are looking to grow their capital further by taking on more risk. The "training wheels" of the micro lot have been taken off.
How much is 1 lot in forex
1 lot in forex is 100,000 units of currency.
The value of the pip for 1 lot is roughly $10 based on the EUR/USD.
Traders who trade in lot sizes are usually experienced and comfortable with the risk associated with it. Although, it's still not a significant amount – in a place where the markets can be unpredictable – it's still seen as the standard trading size across the world.
What is 5 lots in forex
5 lots in forex is 500,000 units of currency.
The value of the pip for 1 lot is roughly $50 based on the EUR/USD.
Now if you are trading 5 lots in forex, then you certainly have a decent trading account size to take on larger risks and larger rewards.
How much is 10 lots in forex
10 lots in forex is 1,000,000 units of currency.
The value of the pip for 1 lot is roughly $100 based on the EUR/USD.
Wrapping it up
Hopefully, you've come to the end with the understanding of what is lots size in forex trading.
Now you've read through the basics of what is lots size in forex and how to calculate them, you can eliminate the simple, yet costly mistakes eager traders do and finally focus on collecting them pips!
The beauty of modern-day trading platforms is that they remember your preferences when it comes to trading, so if you want to trade 0.5 lots then you can allow the system to remember your choice – this speed up trading whilst eliminating careless mistakes.
Source: https://www.alphaexcapital.com/forex-trading/what-is-lots-size-in-forex/
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