Just like you count a dozen bananas or weigh kilograms of apples, the Forex market has its own unit of measurement, and that is the lot size which you can measure using a lot size calculator or manually through the lot size formula. The lot size will dictate the size of your trade, and your returns will depend upon the lot size you take. This is why it’s important to grasp these concepts before you step into trading, as it allows you to make your trading decisions wisely.
A lot is a unit of measurement for the lot size. Let’s understand it this way: When there’s a fluctuation in the value of currencies in a pair compared to each other, we measure this change in pips. Pip is a teeny tiny increment that goes to the 4th decimal place in the price of a currency pair. This means trading a single unit will not give you the desired results. And brokers don’t let you buy a single currency unit for the same reason. You must trade large quantities and bank on small movements to make a profitable trade.
Typically, the value of a lot is determined by a regulator or an exchange so that each trader knows the quantity of their trade. Since traders have different trading styles, lots come in different sizes to cater for their needs. Basically, there are four types of lot sizes: standard lot, mini lot, micro lot and nano lot. The higher the lot size, the higher your exposure to the market and vice-versa.
As discussed above, a lot is a unit of measurement that determines the number of currency units bought or sold in a particular trade. The standard lot size comprises 100,000 units of the base currency, whereas a mini lot has 10,000 units, and the micro lot comprises 1,000 units. There is also a Nano lot, which consists of only 100 units. Let’s understand the purpose of each lot size:
Starting with a nano lot, it isn’t commonly offered by forex brokers because of its really small size. Still, when it comes to testing new trading theories, the nano account can be an invaluable forex tool.
On the other hand, a micro lot is the most loved trade lot size for beginners as it allows them to embark on their trading journey without taking on a huge risk.
Mini account is the next step on the ladder of forex mastery. Traders usually make a switch from a micro account to a mini account as their understanding of the market deepens. Some professional traders also like to stick to the mini accounts as it gives them more control over their trading positions.
A standard lot is the biggest tradeable lot size in forex. Though it feels enticing to trade a standard lot, traders must have sufficient capital and a foolproof risk management strategy to protect their accounts.
For choosing the appropriate lot size in forex trading, you must consider the level of risk you are willing to undertake. The lot size you choose will also give a clear picture of the capital you should deposit or the leverage you need to use, which will in turn magnify each pip movement.
Now, let's take a look at the monetary value of a one-pip movement for each lot size based on trading EURUSD:
l A standard lot = $10
l A mini lot = $1
l A micro lot = $0.10
l A nano lot = $0.01
You need to remember that the currency's value depends upon the base currency of the pair you trade. Also, if you trade with a smaller lot size, then the pip movement will also be less. To know how to measure pips in your own currency, you can use a pip calculator. However, there is also an advantage of trading small lots, i.e., minimising your outlay and reducing the overall risk on your position. However, it's important to note that a smaller lot size will also result in smaller profits if the market moves in your favour. So, finding the right balance between risk and reward is crucial when choosing your lot size.
Most of the time, you don’t have to burden yourself with lot size calculations, as you can do it the easy way with a lot size calculator. This calculator is really user-friendly and graciously provides all the necessary information with just a click. Calculating the lot size manually is also not very difficult, though. You just need to multiply the lot size by the number of purchased lots. However, relying on a calculator is a more convenient approach. It saves the time and mental effort that goes into manual calculations. But it’s completely up to you to decide how you like to calculate the lot size.
A Forex lot is the unit of measurement that determines the size of your trade and lets you know how many units of the currency you'll be trading with. The best part is that there are not one, not two, but four types of lots in Forex: nano, micro, mini, and standard. Each one carries its own unique value and gives you the power to choose your trade size wisely. Your success in trading is defined by how you manage your risk and what you do to preserve your capital.
Believe it! Identifying the right lot size is the first step towards correct decision-making. If the risk on a given trade is higher, it makes sense to enter with a small lot size so you can reduce your exposure to the risk. For the trades you are confident in, you can take a bigger lot size, as it will give you a chance to increase your returns. The ability to choose your lot sizes is a wonderful opportunity for every trade and gives them a lot of flexibility in their trading endeavours. We hope you have strengthened your basics of lot size with this article, don’t forget to share your valuable feedback in the comments section below!