What is a Lot Size in Forex?
Forex is commonly traded in specific amounts called “lots.” Lots describe the number of currency units bought or sold. The size of an order or exchange is known as a lot and it’s placed on the trading platform. This is the amount that a forex trader trades. Because the lot size directly influences the risk, understanding what is a lot in forex and how you determine a lot is critical to having success as a forex trader. Not even the best trading strategy will survive without a clear understanding of the lot size you ought to be using.
What is a Lot Size in Trading?
What does 1.00 lot size mean? That should be an easy question to answer. Let’s face it; if you don’t understand how much is 1 lot in trading, there won’t be much going on at your trading desk. The lot size refers to the magnitude of trades you will execute per trade. These sizes are not the same if you compare them to the stock market. Take a look at the examples.
- A standard lot equates to 100,000 units of the base currency. Most retail investor traders won’t use a standard lot. To minimize your risks, you simply need to have enough money or a fully reliable risk management system to make this lot work in your favor.
- A mini lot is 10 percent of the standard lot, which equals 10,000 units of the base currency. As you start growing in the business and understanding forex trading, you can begin switching to mini lots. Veteran traders use them, so they have more control over their positions.
- A micro lot is 1 percent of the standard lot of 1,000 units of the base currency. At 1,000 units, it is generally the smallest lot you can trade. Rookie traders often use these or the nano lots to greatly reduce loss.
- A nano lot is 0.1 percent of the standard lot of 1,000 units of the base currency. Although flexible, nano lots are not seen very often in forex trading. Traders find them helpful when testing the waters because the risk is minimal.
Ordinarily, brokers show quantity in “lots,” while others use actual currency units. You may have to trade a lot of currency to see a sizable profit or loss. Trading just one unit of the currency pair is neither practical nor recommended. As a result, the forex market developed a system that would be feasible for the industry.
Understanding Pips and The Value of Pips
A percentage in a point, or pip, is the value difference between two currencies. For yen pairs, consider one pip as 0.01 vs. one pip as 0.0001 for other currencies. In day trading, understanding pips is crucial as it speaks of the method of minimizing risks and maximizing profits.
While a small investment won’t return substantial profits, you won’t lose the farm either. As such, the recommendation is that wise traders start small in the beginning and increase the playing field as they gain more experience in lot trading. You may refer to our discussion on ‘ real account trading‘ for a sense of transitioning to live trading.