Anything you buy or sell is decided by a unit of measurement, just like purchasing 1kg of sugar or a dozen eggs from the local store. There is no difference, even in the biggest and most liquid market in the world. Now that you’ve discovered the ideal trading platform, it’s time to go further into the arena of FX trading.
The amount of your order when placing one on the forex market is governed by a unit of measurement called a forex lot size. Your forex trades will always be sized in lots. Therefore, understanding lot size is essential to trading currency pairs successfully on the world forex market.
Forex lot size
The quantity of currency units purchased or sold in a transaction is indicated by the use of lots as a unit of measurement. Each order you place to trade a position will be quoted in terms of lot sizes. There are additional lot sizes besides the standard 100,000 units of currency. Additionally, mini, micro, and nano lot sizes may be found. A micro lot size is 1,000 units, followed by a nano lot size of 100 units. A mini lot size is 10,000 units. A chart of lot sizes issued by the broker will contain all of these.
A crucial personal choice is determining the lot size that best balances opportunity and risk. You can clarify your choices regarding lot size by using a tool like a risk-management calculator. However, you should do so after taking your own risk tolerance and trading goals into account.
The size of a trading lot determines how much a market movement affects your trading accounts. A 100-pip change on a little transaction, for instance, won’t be felt nearly as much as a 100-pip change on a very large deal size. That is why choosing the right lot size is crucial. A trade will become riskier and harder to hold onto if the lot size is too large. If the lot size is too tiny, there may not be enough potential profit to make it profitable.
A standard lot has 100,000 units. If you are trading in dollars, then the transaction is worth $100,000. Trading with a position of this size entails a $10 swing in the value of the trader’s account. A 20-pip shift can change the account balance by 10% for a trader with only $2,000 in their account. It is typically the least amount needed to trade a standard lot. For this reason, the majority of retail traders with modest accounts avoid trading in standard lots.
The majority of forex traders you will encounter will trade tiny lots or micro lots. Although it may not seem glamorous, maintaining a reasonable lot size in relation to the size of your account will help you protect your trading money so that you can keep trading over the long run.
Mini lots existed prior to micro lots. 10,000 of the funding currency for your account makes up a mini lot. Each pip in your trade would be worth approximately $1.00 if you were using a dollar-based account and trading a dollar-based pair. Make sure you have enough capital set aside before you begin trading with mini lots if you’re a beginner.
Despite the fact that $1 per pip may appear insignificant, in forex trading, the market can change by 100 pips in a day and occasionally even in a single hour. You will lose $100 if the market is moving against you. Your ultimate risk tolerance is up to you. However, if you want to trade with a mini account, you should start with at least $2,000 to feel secure.
The smallest tradeable lot that most brokers can offer is called a micro lot. They come in batches of 1,000 of the funding currency for your account. A micro lot is $1,000 worth of the base currency you intend to trade if your account is funded in US dollars. One pip would be equivalent to ten cents when trading a pair using a dollar price basis. Two Micro lots are excellent for new traders who wish to practice their skills with the least amount of risk possible.
A trade size that is 1/1000th of a standard lot is referred to as a nano lot. The smallest lot you can trade is a nano lot, which has a value of 100 units, or $100. Because the lot value is so low, this is where most beginners start when choosing a recommended lot size. Since each pip is actually worth $0.01, every up or down movement when trading with a nano lot results in a profit (or a loss) of $1.
As you may already be aware, “pips” is a very, very small proportion of the value of a unit of currency. It is used to quantify the change in one currency’s value in relation to another. You need to exchange a lot of one currency to make any noticeable profit or loss. While trying to take advantage of this tiny movement in value.
You may be curious how I can trade with lots as little as 1,000 or even 100,000 basic units. Well, it’s a really straightforward answer. Due to the leverage in your account, you have access to this. Let’s assume that your account has a 100:1 leverage ratio. This implies that you actually trade $100 worth of currency for every $1 you use. The needed margin to open a position of $100,000 will be $1,000 in order for you to trade. Any losses or profits will be subtracted from or added to the sum in your account, respectively.
You will study trading lots when you initially begin your forex training. A batch of currency that the trader has control over is referred to as a lot in the context of FX trading. The lot size can differ. Standard lots, mini lots, micro lots, and nano lots are examples of common lot size categories. It is necessary to keep in mind that the size of the lot immediately affects and reflects the level of risk you’re accepting.