Lot Forex ?
A lot is the size of the volume with which you open a trade, for example, I opened a trade of EURUSD at a lot size of 0.1, where 0.1 is the lot size. It basically, is the currency unit of the currency trade you have opened.
Here are four lot types that exist:
1. The Standard lot has a size of 100,000 units.
2. The Mini lot has a size of 10,000 units.
3. The micro-lot has a size of 1,000 units.
4. And the Nano lot has a size of 100 units.
In forex, you can choose any lot size as per your capital amount. Well, there are some brokers who show the quantity is lots, whereas some show it in actual currency units, but what I have seen yet is that mostly it is shown in lots.
The calculation in forex is done on the basis of pips which is a very small quantity to take advantage of such small price movements, one is needed to have a higher lot size, but that again comes with risk because if you are just playing with luck you can lose all you have whereas, if played carefully you may earn a lot.
Fig 2. Illustrates the calculation for profit and loss
Let’s consider some examples, having 100,000 unit meaning standard lot size, Now let us recalculate to see how the pip value get affected:
1. USDJPY at an exchange rate of 125.25: then (0.01 / 125.25) * 100,000 = $7.98
2. USDCHF at an exchange rate of 145.12: then (0.01/145.12) * 100,000 = $6.89
Where US dollars is included the formula become a bit different:
3.EURUSD at an exchange rate of 1.525: then (0.01/1.525) * 100000 = 655.73 * 1.525 = $9.425
4.GBPUSD at an exchange rate of 1.642: then (0.01/1.642) * 100,000 = 609.01 * 1.642 = $8.424
The above example basically shows how much profit or loss you are going to have if you consider the Standard lot size with every pip movement.
Why lot size matters?
Lot size does matter because it decides how much profit or loss is going to happen. If the lot size is small then even a small 50 pip movement will not give you much but if you use a large lot size then even a 100-pip movement can give you a huge amount of profit.
To calculate which lot size is best for you, you can check it by using a risk management tool, or in another way it can also depend on your capital amount. If your capital amount is less then use a small lot size and if you have a huge capital amount you can go for a large lot size but one thing to remember over here is that one should be experienced to handle the trades because if something goes wrong then you may suffer a huge loss.
Fig. 3 Illustrates which lot size to use when, such as nano lots are used by beginners but this lot size is offer by very few brokers, a micro lot is mostly used by beginners to minimize the risk, a mini lot is used by experienced traders and most of the retail traders don’t use a standard lot, this lot size is basically used by non-retail clients who have huge money to invest.
Trading with Nano Lots
The smallest unit of the lot which only some brokers offer is 100 units if you are trading dollar-based pair it will give you a profit of 1 cent on the movement of 1 pip, this lot size is best suitable for beginners so that they can learn with losing or gaining less amount. By keeping the lowest size of the lot, you are keeping the risk at a minimum.
Trading with Micro Lots
This is the second smallest unit of the lot which most of the brokers offer it has the size of 1000 units, if you are opting for micro-lots and trading with a dollar-based pair you will get a gain or a loss of 10 cents on every 1 pip movement. This is also used by beginners to learn and be at the minimum risk, although some experts do use this lot size if they are going to hold the trade for a long time.
Trading with Mini Lots
Now the next available lot size is a mini lot containing 10,000 units, using this lot size if you are trading a dollar-based currency you will be earning $1 on every 1 pip movement. This lot size is used by experienced traders and is used mostly when they are sure that the trend is going to be the way which they have analyzed. Even beginners can use it, but make sure to have a sufficient capital amount in your account if you want to go with mini lots.
Although USD 1 seems to be not much of an amount, forex trading being the most volatile market can make 100 pips movement in a day, sometimes it also happens in an hour as well. So, there is a huge risk of losing $100 in a day. So, you are needed to have enough capital amount to bear the losses if you face any.
Trading with Standard Lots
The standard lot size has 100,000 units and if you are trading a dollar-based currency you will gain $10 at 1 pip movement which is quite a high amount in profit and loss as well. For trading with this huge lot size, you are supposed to have a lot of money in your account because here even a 10 to 20 pips movement can bring a lot of change to the capital amount. So, most retail traders don’t use this lot size.
Considering have a huge impact on the capital amount most of the traders prefer to trade with micro and mini lot size. One of the reasons for trading with lower lot sizes is that they can trade for a long time with a limited amount of investment.
Where to check lot size in MT4 platform?
To check the lot size, or select the lot size while opening trade in the MT4 platform is as per the below image.
Fig. 4 Illustrates the lot size/ volume, it is shown in the highlighted box.
Well, one thing to remember here is that while opening trade don’t forget to set the size of the lot because it will directly make an impact on your capital amount. In beginning I was also not aware of the fact that there are several lot sizes in forex I used to trade using standard lot size which unfortunately led me to lose more but once I came across to know about it then I would always keep my lot size to 0.01 so that the risk can be handled.
A lot is known as a number of currency units. There are four types of lot Nano Lot, Micro Lot, Mini Lot, and Standard Lot. One more thing to note is that most brokers only offer three types of the lot which are mini, micro, and standard. It depends on you how much volume you want to open a bid with. According to the size of the lot, one can calculate how much profit or loss will take place. The four lots which are present with every broker are 0.01, 0.1, 1.0, and 10.0 other than that you can use any size by typing the same while opening the bid.