Abstract：A “lot” is a common unit of measurement in forex trading that indicates the size of a trading contract, which is the quantity of the base currency under consideration when an investor purchases or sells foreign exchange. Various lot sizes are frequently offered by forex brokers for market entry.
What is a Lot in Forex?
A “lot” is a common unit of measurement in forex trading that indicates the size of a trading contract, which is the quantity of the base currency under consideration when an investor purchases or sells foreign exchange. Various lot sizes are frequently offered by forex brokers for market entry.
The normal size of one lot is 100,000 currency units. Mini lots, micro lots, and nano lots are also available these days; they are 10,000, 1,000, and 100 units, respectively.
The Significance of Forex Lots
Forex lots play a crucial role in forex trading, mainly reflected in the following aspects:
Measuring Trading Scale
Lots are the standard for measuring currency trading volume. Different lot sizes represent different magnitudes. Investors can choose appropriate lot sizes based on their financial strength to participate in trading.
Affecting Trading Costs
The number of lots is directly proportional to margin requirements. Larger lots require more margin, and trading costs like spreads and commissions accumulate with more lots. Investors should consider cost factors when choosing lot sizes.
Relating to Risk Degree
Lot size determines risk exposure. Larger lots lead to greater losses in unfavorable markets. Choosing the right lot size aids risk control with tools like stop-loss and take-profit orders.
Assisting Strategy Formulation
Lot size choice allows position adjustment. Increase lot size in clear trends for profit, reduce it in volatile markets to avoid risks. Different combinations can construct diverse strategies, diversify risks, and optimize returns.
Forex Lot Types
Standard Lot
The standard lot is the most common trading unit. In forex trading, 1 standard lot usually represents 100,000 units of the base currency. For example, when trading EUR/USD, 1 standard lot means trading 100,000 euros.
Due to the relatively large trading scale, the margin required for a standard lot is relatively high. The amount of margin depends on factors such as the leverage ratio of the trading instrument. Taking a leverage ratio of 1:100 as an example, if you trade 1 standard lot of EUR/USD and assume the current exchange rate is 1.1000, the required margin is approximately $100,000 ÷ 100 =$1,000 (ignoring spreads and other factors here).
Because of the large trading scale, the profit or loss brought about by each point movement of the price is also relatively large. Taking EUR/USD as an example again, if the exchange rate fluctuates by 1 point, the profit or loss of 1 standard lot is $10 (0.0001 × 100,000). Therefore, standard lot trading is suitable for investors with certain financial strength and risk tolerance who are seeking a larger profit margin.
Mini Lot
A mini lot is one-tenth of a standard lot, meaning 1 mini lot represents 10,000 units of the base currency. For example, in forex trading, 1 mini lot of EUR/USD means trading 10,000 euros.
Compared with a standard lot, the trading scale of a mini lot is smaller, and the required margin is correspondingly reduced. Taking a leverage ratio of 1:100 as an example, the margin required for trading 1 mini lot of EUR/USD is approximately $10,000 ÷ 100 =$100 (ignoring other factors).
For each point movement in mini lot trading, the profit or loss is $1 (0.0001 × 10,000), which is relatively smaller than that of a standard lot in terms of risk and return. This makes mini lot trading more suitable for investors with relatively less capital, those who are just entering the market, or those with lower risk tolerance to practice and operate.
Micro Lot
The micro lot is one-tenth of the mini lot, meaning that 1 micro lot represents 1,000 units of the base currency. For instance, when trading 1 micro lot of EUR/USD, it means trading 1,000 euros.
Since the trading scale is further reduced, the margin required for a micro lot is even less. Calculated with a leverage ratio of 1:100, trading 1 micro lot of EUR/USD requires approximately $1,000 ÷ 100 =$10 margin (ignoring other factors).
For each point movement in micro lot trading, the profit or loss is $0.1 (0.0001 × 1,000), which is the smallest among the three lot sizes in terms of risk and return. This lot size is a great entry option for novice investors with very limited funds, allowing them to familiarize themselves with the trading process and market fluctuations while controlling risks.
How to Choose the Appropriate Lot Size in Forex?
When choosing a suitable lot size for forex trading, multiple factors need to be considered comprehensively:
Capital Strength
If you have a relatively large amount of capital in your account (such as tens of thousands of dollars or more), you can consider standard lot trading. This allows you to bear larger risks and capital occupation in pursuit of high returns. If your capital is relatively small (ranging from a few hundred to a few thousand dollars), mini lots or micro lots are more appropriate, as they can help you control risks and avoid significant losses.
Risk Tolerance
Investors with strong risk tolerance and a pursuit of high returns can choose standard lots, provided they have effective risk control measures in place. Those who prioritize capital safety and have low risk tolerance are more suitable for starting with mini lots or micro lots.
Trading Experience and Skill Level
If you have extensive forex trading experience and mature trading techniques, you can adjust the lot size flexibly according to market conditions. For those who are unfamiliar with the market and trading skills, it is advisable to start with micro lots or mini lots to accumulate experience.
Market Conditions and Trading Strategies
If the market shows a clear unilateral trend and you are confident in your judgment, you can appropriately increase the lot size to increase profits. When the market is volatile or highly uncertain, you should choose a smaller size to reduce risks.
Trading Objectives and Time Frames
For intraday or ultra-short-term trading, in order to quickly lock in profits and stop losses, mini lots or micro lots can be chosen. If you plan to hold positions for the long term and have time to cope with market fluctuations, you can select a relatively larger lot size according to your capital and risk tolerance, while ensuring proper risk control.
How to Calculate the Lot Size in Forex?
In forex trading, the common methods for calculating lot size are as follows:
Given Funds and Value per Point
Determine the value per point of the currency pair (approximately $10 for a standard lot,$1 for a mini lot, and $0.1 for a micro lot; for cross-currency pairs, it needs to be calculated according to a formula). Divide the trading funds by (value per point × risk amount per point) to obtain the lot size.
With$1,000 in funds, if the value per point of EUR/USD is $1 (mini lot) and the risk per point is$10, the number of lots that can be traded = 1,000 ÷ (1 × 10) = 100 mini lots.
Given Funds and Stop-Loss Points
Multiply the trading funds by the risk ratio, and then divide by (stop-loss points × value per point) to get the lot size.
With $5,000 in funds, if the value per point of GBP/USD is $1.2 (mini lot), the stop-loss is 20 points, and the risk ratio is 2%, the number of lots that can be traded = (5,000 × 2%) ÷ (20 × 1.2) ≈ 4.17 mini lots, which is rounded down to 4 mini lots.
Calculation Based on Leverage and Margin
Clarify the leverage ratio and the margin required for 1 standard lot, calculate the available margin (total account funds - used margin), and divide the available margin by (margin for 1 standard lot ÷ leverage ratio) to obtain the number of standard lots. The number of mini lots is 10 times that of standard lots, and the number of micro lots is 100 times.
For an account with $2,000, a leverage ratio of 1:100, and a margin requirement of$1,000 for 1 standard lot of EUR/USD with no other positions, the number of standard lots that can be traded = 2,000 ÷ (1,000 ÷ 100) = 20, which means 20 mini lots or 2,000 micro lots.
How do I calculate profits and losses?
Now that you know how to calculate pip value and leverage, let's see how to calculate your profits or losses. Suppose we buy US dollars and sell Swiss francs:
1. The exchange rate you're quoted is 1.4525 / 1.4530. Since you're buying dollars, you'll trade at the “ask” price of 1.4530, which is the rate at which traders are willing to sell.
2. So you buy 1 standard lot (100,000 units) at a price of 1.4530.
3. A few hours later, the price changes to 1.4550, and you decide to end the trade.
4. The new quote for US dollars / Swiss francs is 1.4550 / 1.4555.
Since you initially bought to open the position, to close it, you now have to sell to close. So you must buy at the “bid” price of 1.4550, which is the rate at which traders are willing to buy.
5. The difference between 1.4530 and 1.4550 is 0.0020, or 20 pips.
6. Using the previous formula, we now have (.0001 / 1.4550) x 100,000 = $6.87 per pip x 20 pips =$137.40
