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Many agree that money is the primary driving force for why people trade in the forex (FX) market.
Sadly, newbie traders with near-zero knowledge regarding forex trading think they can make millions overnight.
FX trading can be an excellent way to build wealth, but it’s a tough grind. Assuming you don’t research, prepare and work hard to make informed trading choices, you will not earn or, worse, you will lose your entire capital.
In a way, FX trading is as easy as choosing a reputable forex broker, creating an account and trading currency pairs using the broker’s platform. However, your strong analytical skills are essential to becoming a successful trader.
For example, learning to calculate lot size in forex can help you craft a sensible money management and trading plan.
While the amount of maths required to trade FX effectively might turn off some aspiring traders, number sense is necessary to determine the best forex strategies.
Whether you’re a novice looking for a safe trading environment or an experienced trader seeking optimal trading conditions, hard-won insights can help you trade effectively.
Read on for more information about FX trading, including calculating lot size in forex, various forex lot sizes and tips on engaging the FX market competently.
What Is a Lot in Forex Trading?
A “lot” is your trade or position size — the number of currency units you plan to buy or sell. You invest in a particular currency and then sell for a higher price later.
As mentioned above, lot calculation is a crucial aspect of your account risk management system. Knowing the lot trade size is critical to developing a balanced trading approach.
In the FX market, you will conduct all your transactions via standard, mini, micro, and nano lots. Each of these lot sizes represents a specific measure of units of the base currency.
Here’s a table indicating the differences in the lot sizes:
| Lot Size | Units of Base Currency | Volume |
| Standard Lot | 100,000 units | 1.00 lot |
| Mini Lot | 10,000 units | 0.1 lot |
| Micro Lot | 1,000 units | 0.01 lot |
| Nano Lot | Below 1,000 units | 0.001 lot |
Here’s a simple example to help you understand better how these differences apply to the forex market.
Suppose the euro (EUR) and the United States dollar (USD) pair or EURUSD rate is 1.1485. In that case, you must have 114,850 quoted currency units to open a standard-lot position.
This measurement means you need 114,850 USD to buy 100,000 EUR, the base currency.
Note: standard lot = 1.00 lot = 100,000 units
100,000 units 1.1485 = 114,850 USD or $ 114,850
The “quote currency” is the amount you use to buy or sell the account base currency. In currency pairs, the first currency is known as the “base currency”, while the second one is the “quote currency”.
Therefore, in the EURUSD pair, EUR is the base currency, while USD is the quote currency. The currency pair price represents the quote currency.
Here are additional examples of how this mechanism works:
Suppose a 0.01 lot of the British pound sterling (GBP) and U.S. dollar currency pair (GBPUSD) has a quote of 1.42921. In that case, you must pay 1,429.21 USD to buy 1,000 GBP.
Note: 0.01 lot = 1,000 units
1,000 units 1.42921 = 1,429.21 USD or $ 1,429.21
In the same way, if a 0.01 lot of the euro and Australian dollar (AUD) pair (EURAUD) has a quote of 1.95618, you must pay 1,956.18 AUD to buy 1,000 EUR.
Other markets use different measurements for position sizes. For example, a stock market trade size depends on the number of stocks.
However, the number of stocks depends on the asset type. For instance, gold is measured in troy ounces and oil in barrels.
You can typically see the lot value, the number of conventional currency units per trade, in the specification.
Meanwhile, forex traders set minimum and maximum lot volumes for their trading accounts. These accounts usually have a top limit of 100 lots and a bottom boundary of 0.01 lots.
Using the EURUSD pair example above, the minimum capital requirement is $1,148.5. Although, with a 1:100 leverage ratio, you can begin trading with a minimum deposit of $11.485.
Note: “Leverage” lets you open and maintain a position with a lesser initial investment, usually by “borrowing” capital to cover the total price of the position.
If you use a 1:100 leverage ratio, the broker only has to set aside 1/100 of the trade or deal size for you to open a position.
$1,148.5 (minimum lot size value) 100 = $11.485
Note that the ratio also magnifies potential profits and losses.
You can also trade using a cent trading account to minimise risk. With this account type, the calculations are in cents, not in dollars, so you can buy lots with a lesser initial deposit and without using leverage.
Understanding Lots in Forex Through Boxes of Chocolates
Here’s a brief illustration regarding lots in forex:
An organisation sell boxes of chocolates in two sizes: 12 and 24 chocolates.
These are the standard sizes that consumers expect to get when they buy. They don’t purchase one chocolate from the box.
Similarly, with forex currency pairs, you can’t just purchase one currency unit; you buy a lot. Lots often come in universally recognised sizes.
Understand Pip Value for a Trade
Pips are one of the most, if not the most, commonly quoted incremental price movements in the currency market.
If you trade a currency pair where the U.S. dollar is the second currency and dollars fund your trading account, the pip values usually remain the same. For a micro lot, the pip value equals $0.10.
For a mini lot, it’s $1, while for a standard one, it’s $10.
Suppose your trading account is set up with dollars, and the quote currency in the pair you’re dealing with isn’t the U.S. dollar. In that case, you must multiply pip values by the exchange rate for the dollar and the quote currency.
Suppose you’re trading the euro/British pound (EURGBP) pair, and the USDGBP pair is trading at $1.2219.
- For a micro lot of EURGBP, the pip value equals $0.12
($0.10 $1.2219)
- For a mini lot, the cost would be $1.22 ($1 $1.2219)
- For a standard lot, the pip’s worth is $12.22 ($10 $1.2219)
Remember, as a trader, you should consider the host currency when getting a quote for direct exchange, which involves a deal based on the host currency.
Why Use Lot Size Calculator?
This tool can help you assess how your trading equity can change following a series of profits or losses.
Note: Many forex traders refer to the lot size calculator as the position size calculator or forex calculator.
How Does a Forex Lot Size Calculator Work?
Using a forex calculator, you can determine the suitable lot size for your position depending on the risk you want to take.
- Choose the instrument to trade and the forex trading account’s account currency or account base currency.
- Determine the lot size you want to trade and the leverage you want to use.
A forex calculator can help you calculate your trade’s margin and pip value.
Forex Lot Sizes Explained
As noted above, you could only transact in the FX market using standard, mini, micro, and nano lots. Each lot size reflects a different measure of base currency units, thus presenting various pip values.
Below is an overview regarding the differences in lot sizes, measured in units, and volume for various currency pairs.
What Is a Standard Lot in Forex?
A standard lot in forex equals 100,000 units of currency. Market participants, whether independent traders or institutional investors, use this unit size as a standard.
If the EURUSD exchange rate is 1.3000, one standard lot of the base currency (EUR) equals 130,000 units.
Based on the current price, this scenario means you will need 130,000 units of the quoted currency (USD) to purchase 100,000 units of EUR.
What Is a Mini Lot in Forex?
A mini lot is 10% of a standard lot. Suppose you open a 1-lot single trade with a mini lot forex trading account. In that case, you’re buying or selling 10,000 units instead of 100,000 with a standard lot.
Mini lots are convenient since they require fewer funds to open a trade, making them more suitable for smaller deposits.
What Is a Micro Lot in Forex?
Suppose the forex trading asset is the EURUSD pair; the exchange rate is 1.1628, and you want to open a position of one lot. In that case, you must spend 116,280 USD to buy 100,000 euros.
Note: one lot (standard lot) = 100 000 units
1.1628 100,000 units = $ 116,280
If you are a retail trader, you might have less capital. Fortunately, the forex market lets participants buy micro lots (which have a volume of 0.01). In this case, you must invest $1,162.80.
1.1628 1,000 units = $ 1,162.80
A well-known risk management rule suggests an account risk per trade of 2% for a currency deposit.
What Is a Nano Lot in Forex?
A nano lot equals 0.1% of a standard lot. Nano-lot accounts are known as cent accounts. Generally, regular accounts don’t allow transactions for such small volumes. Also, cent accounts can be disadvantageous. While the transaction volume, or investment, is significantly less, your potential profit is also considerably low.
How To Choose Lot Size in Forex
When choosing a lot size, consider the level of risk you want to assume. The greater the lot size, the greater the down payment or leverage required – and the more each pip movement magnifies.
A one-pip movement will cost you the following amounts for each lot size when trading EURUSD:
- A standard lot = $10
- A mini lot = $1
- A micro lot = $0.10
- A nano lot = $0.01
Remember, currency values are determined by the base currency within the currency pair you are trading.
In this case, the smaller the lot, the lower the one-pip movement costs, which means you can trade smaller lots for less money.
How to Calculate the Lot Size When Trading Forex
You don’t usually have to calculate the lot size; your trading platform could tell you that.
However, when placing a trade, it helps to know your options – standard, mini, micro, and nano and which lot size to use.
You can determine the total size of your position by adding up the size of each lot and the number of lots you purchased.
Set Your Account Risk Limit per Trade
Many traders lose money because they don’t understand or value risk management. Risk management involves deciding how much you are willing to risk and what you hope to gain.
Without risk management, traders can maintain losing positions for an overly long time but prematurely take profits on winning positions.
An optimal risk management strategy should address the following questions:
- What risk level are you willing to take as a trader? What is your risk tolerance? What are acceptable losses based on your profit targets? Note that the greater the risk, the greater the profit potential.
Conversely, the loss potential also increases. Every trader must determine their ideal balance. To that end, you can combine conservative and aggressive strategies.
- What is the acceptable drawdown? At what level should you set your stop loss?
Based on the position’s volume and the point’s value, you can estimate the volatility level (stop loss levels) and establish a valid number of stop loss points.
- What transaction volume is necessary for compliance with the risk management system? Risk management rules depend on mathematical probabilities and progressions.
The transaction volume is calculated accurately based on the current and average volatility (stop loss levels), the deposit value, and the leverage.
The following factors used for building an FX trading model might affect the risk level:
- Transaction volume in lots and lot type
- Leverage
- Risk calculator per transaction
- The total level of risk associated with all open deposits
- Pip value
- Stop loss level
- Spread level
- Deposit amount
- Target profits
Note
While trade variables may change, professional traders keep their account risk constant. Don’t risk 3% on one trade, 2% on the next and 3% on another.
Stick to your chosen percentage or pound amount — unless you exceed the 1% percentage limit with your preferred amount.
Plan for Pip Risk on a Trade
Once you know your maximum account risk for every trade, you can concentrate on the trade at hand.
The difference between your entry point and where you set your stop-loss order determines your trade’s risk.
A pip is the smallest change in a currency price. For many currency pairs, a pip is 0.0001, or one-hundredth per cent.
For pairs that involve Japanese yen (JPY), a pip is 0.01, or 1 percentage point. Some brokers display prices with an additional decimal place. A pipette is the fifth decimal place (or third in yen).
A stop-loss order closes the trade if it loses a specific amount. This feature helps ensure that your loss stays within your account risk limit and determines its location based on the pip risk of the trade.
Pip risk varies with volatility and strategy. Sometimes, a trade has five pips of risk, while another might have 15.
Forex trading comes with a risk warning: never trade money you cannot afford to lose. Monitoring market notifications can help you stay on top of potential risks and take more informed trades.
You should always control your risk effectively by using stop-loss orders, minimising leverage and diversifying your trades. Stay informed and alert. You can reduce your risk exposure in forex trading.
Additional Note
When trading, pay attention to your entry point and stop-loss location. You want your stop-loss to match your entry point as closely as possible but not too close that the trade stops before its expected movement.
Once you’ve calculated the distance between your entry point and your stop loss in pips, the next step is to estimate the pip value based on the lot size.
How To Calculate Stop Loss in Pips?
The formula for calculating profit and loss is pretty straightforward. To calculate a position’s profit and loss, you need the size of the position and the number of pips the price has moved.
Profit or loss will depend on the position size multiplied by the pip movement. Use these values to determine the ideal stop loss.
Calculate Forex Lot Size Position
Remember that a standard lot represents 100,000 currency units, a mini lot is 10,000 units, and a micro lot is 1,000 units.
You must consider several factors to calculate your lot size position. These factors include your account balance, chosen currency pair, and risk aversion.
Suppose you’ve deposited $10,000 in your trading account and plan to trade the EUR/USD currency pair. Also, your risk management strategy should be at most 1% of your account balance for each trade.
Using this information, you can determine your lot size position using a formula. For example, your lot size would be as follows if your stop loss is 50 pip away from your entry point:
Lot size = risk per trade pip value
Lot size = $100 (50 $10)
Lot size = 0.2 lots
Note that risk per trade is 1% of the account balance ($10,000 x 1%). Meanwhile, the pip value for a standard lot is $10.
How To Use the Risk and Position Size Calculator
When using a position size and risk calculator, you might have to fill in the following fields:
- Instrument: You can choose from significant forex pairs, minors, exotics, and several cryptocurrencies (cryptos), including BTCUSD (Bitcoi-USD), ETHUSD (Ethereum), gold, silver, and oil.
- Account balance: Inputting account equity is pretty straightforward.
- Stop-loss (pips): Traders should enter the maximum amount of pips they are comfortable risking. This example might use 100 pips for your stop-loss.
- Deposit currency: It is essential to know the account base currency when determining the ideal lot size, considering the pip value and the cross’s market rate.
- Risk: This is a critical field of a position size and risk calculator. In this field, traders can choose a risk percentage or the account’s base currency.
As a rule, professional traders do not risk over 2% of the account equity per trade.
This trading guideline allows traders to last longer in their careers and eventually recoup from previously losing trades. So, in our example, we will select 2% risk.
The results: A position size and risk calculator might use a market price live feed with up-to-date interbank rates to show the relevant currency pair price.
Using a stop-loss of 100 pips and risking 2% of account equity, the recommended lot size would be 0.05 lot.
Meanwhile, the calculator might display the number of units that the 0.05 lot represents, 5,000 units, and then the amount of the account equity at risk, which is 40 USD.
A forex calculator can help you accurately estimate how trading account equity can be affected after losing trades.
How Can I Start Trading Forex?
As indicated in earlier sections, trading forex is challenging, although incorrectly starting is easy. For instance, many traders invest too much money, use too much leverage, and quickly get into substantial drawdowns.
People with diverse backgrounds use their trading capital differently. Still, this section suggests ways to get started and prepare for trading adequately.
The simulated or demo account is one of the most effective tools for practising forex trading.
This account type enables you to trade without risking any money. The trades go via an identity platform, as in an actual trade, but they’re not executed.
Instead, the demo account history tracks hypothetical profits and losses. Note that demo accounts do not perfectly mirror the complexity of real-life trading markets.
Some people mistakenly believe that making significant wins on a demo account guarantees success in real trading ventures.
That said, demo accounts are excellent ways to test your trading skills in a controlled environment. Ultimately, it is up to each trader to decide when to try their skills in actual trading.
The ideal approach is to view simulation as a first step to testing real-world trading, not as the end of training but as a necessary step in becoming a forex trader.
The idea that one can start trading forex simply by registering an account with some random broker you’ve found online is problematic.
Trading from scratch, via trial and error, without input from seasoned traders and expert analysts, invites significant drawdowns.
Your journey into forex trading begins before you trade. You should start by building fundamental knowledge and technical skills, practising those skills without risk and then applying those skills to real accounts with varying levels of risk.
Moreover, trading preparation isn’t linear; it’s an ongoing process. As such, developing a winning mindset is crucial.
Here are some practical tips for reinforcing good trading practices:
- Take a self-check. You should always perform a self-scan. Assess your state of mind as soon as you wake up or return to your computer after a break.
- Go for a walk to clear your mind.
- Learn from quality resources or read news regarding the forex market. If you’re a day trader, you can do this with coffee or your favourite beverage in the morning.
- Turn your mobile phone off or launch “airplane mode” to avoid distractions.
- Analyse fundamentals to determine a currency pair’s current momentum and use it to inform your next trade decision.
- Examine monthly, weekly and daily charts to identify key resistance and support levels.
- Look at the charts for the trade-weighted index for each currency pair.
Following these steps results in more than knowing how to evaluate the market. These things can also help generate greater confidence necessary to make winning trades. They also help prepare the trader’s mindset for uncertainties.
Here are other principles you could consider to guide your initial attempts in forex trading:
- Trading in simulation only works as a learning tool if the method used to guide your practice trades is sound.
- Training to trade should match the capital you intend to trade.
- The first 50 actual trading sessions are usually test sessions.
- Use only a maximum of two leverages for the first 100 actual trades.
- Losing trades offers valuable lessons: embrace losses and learn from them.
- A trading plan will help little or will not help if you don’t understand how it fits your expectations.
- Trading success goes beyond profitability; it is about replicability.
- There are no best times to trade; there are only best trading patterns.
- Analyse the market independently before reading someone else’s analysis.
- Find a reputable trading site that offers competitive trading opportunities and can help improve your trading decisions.
Although having a plan and developing strategies is critical, you place your trades through a forex firm. The industry proliferates, and forex firms operate worldwide.
Choosing the right broker makes all the difference. While most firms offer basic features, the main factors to consider when selecting a broker include the pip spread, trading platform, customer support, and trading resources.
You also face several different kinds of risk, including the following:
- Market risk: Every trader and investor faces this risk. Market risk comprises price changes that negatively affect your trades and investments.
Market risk, including changes in the financial markets, persists from when you open a forex position to when you close it.
- Exchange and interest rate risk: Foreign exchange rates can change anytime. Therefore, two primary factors can affect the currency’s value when dealing with forex: exchange risk and interest rate risk.
Foreign exchange traders assume exchange risk (associated with their preferred pair of currencies) when they buy or sell foreign currencies.
Every time you get a new foreign exchange position, you’re assuming the risk that the exchange rate might move against you, depreciating your position’s value.
In only a matter of seconds, a profitable transaction can turn into an unprofitable one.
For instance, the exchange rate and the currencies’ underlying interest rate can cause foreign exchange position values.
Example: The Bank of England, the United Kingdom’s central bank, increases or decreases its currency’s interest rate. In that case, expect the change to impact your positions significantly.
- Country risk: Risks under this category include political, regulation, legal, and holiday-related risks.
- Counterparty risk: In the FX market, you transact with a counterparty, the other entity involved in a transaction. This counterparty could be a broker, trader, bank, or banker.
Every time you buy a currency option or order a forward transaction, there’s a possibility that the transaction’s counterparty will be unable to fulfil its obligations.
On the other hand, if you trade in foreign currency futures, your risks might be less because the industry is highly regulated.
- Liquidity risk: This risk is typically not a concern when you trade the most commonly traded currencies.
Suppose you trade in less active currencies. In that case, the inability to sell a currency when you want can become a problem, especially if there is no market for that currency to trade on.
- Volatility risk: Volatility risk involves fluctuations in exchange rates impacting foreign currency positions.
Currency prices can vary thousands of times a day.
Options on currencies are valued based on their volatility and the underlying price changes.
In a way, trading in foreign currencies is the modern-day Wild West. Still, some institutions can help you reduce the risks — if you take advantage of them and trade within their limits.
Currencies fluctuate primarily due to supply and demand. Fundamentally, a currency rallies when there is a demand for it.
Whether the demand is for hedging, speculation or conversion, actual movements are driven by demand for the currency. In contrast, currency values fall when there is an excess supply.
The fundamental determinants of future movements should be supply and demand. However, predicting supply and demand is more challenging than many people realise.
Two main factors influencing currency supply and demand are interest rates and the economy’s overall strength.
The primary regulators of foreign currency trading are central banks worldwide. They keep track of currency flows between countries and the balance of payments between banks and governments.
The U.S. Treasury Department and the Federal Reserve regulate financial transactions in the United States, while the Bank of England does the same in the U.K. Many global currency markets have regulatory authorities with similar functions.
However, if you work with non-banking institutions, you operate outside the safety net of regulatory oversight and risk the pitfalls of caveat emptor. Let the buyer beware.
In addition, before you begin trading forex, you should establish realistic goals. Don’t set ridiculous goals, such as becoming wealthy within a month.
Some traders set such goals because they need to understand the market thoroughly. You’ll go a long way in trading if you set quantifiable goals. Developing a simple and valuable goal is essential.
Focus on long-term goals as well. Setting monthly, weekly and yearly plans can help you stay on track during your Forex trading career.
Here are three easy steps to start trading:
- Open a trading account.
- Select a trading platform. Some reputable brokers, like Taurex, offer MetaTrader 4 and MetaTrader 5.
- Trade on instruments in FX (Forex), commodities, metals, stocks, and indices
You have two trading options: “go long” (buy) or “go short” (sell).
Frequently Asked Questions
- How do you hedge a forex position?
You have various ways to hedge a forex position. You could use any trade you think will move in the opposite direction of your existing position as a hedge.
You can also hedge a trade using another FX position. For instance, you can sell a dollar in one pairing and buy it in a different pair.
Lastly, you can hedge in different markets, such as futures contracts or dollar index ETFs.
- What is an open position in forex or FX trading?
An open position is a trade you’ve yet to complete. For example, in the FX market, you can buy or sell currencies like the U.S. dollar, Japanese yen and euro.
You leave a position “open” if you don’t want to buy or sell a currency immediately. When day trading, you can usually open and close positions multiple times in an hour.
- How much is a 1.00 lot size?
A 1.00 lot size represents 100,000 currency units. This lot size is known as a standard lot.
- How many dollars is equivalent to a 0.01 lot size?
A 0.01 lot size is known as a micro lot. This lot size accounts for 1,000 base currency units in every forex trade, determining the amount of a particular currency.
Suppose you’re trading the USDJPY (U.S. Dollar-Japanese Yen) currency pair, and the base currency is the USD. In that case, a 0.01 lot is equivalent to 1,000 U.S. dollars.
Currency trading is similar to stock trading in that you need a plan to determine what you’re trading and how much you’re willing to risk.
If you have a solid plan, stick to it throughout the trading day. You shouldn’t develop and execute the plan simultaneously.
Foreign exchange trading requires intense focus, and you can’t risk breaking it to do additional planning during a trading session. Monitor the progress you make toward your goals.
If you’re not achieving your objectives, you may want to step back and reevaluate your plan and your decision to trade in foreign currency.
Nobody is a born trader, so don’t worry if you lose on your first attempt. Besides, every professional trader was a beginner once! Are you in the “trying phase”? If so, give it your best shot.
If you want to trade without learning, there’s no way you’d get the outcomes you desire. If you intend to profit from trading, you must do the work.
Understanding how to calculate a lot size in forex is an excellent start to creating a winning FX trading strategy.
