The term “trade size” refers to the amount of currency you’re going to buy or sell.
In Forex, this amount is often measured in lots.
Br > But what is a lot? And how does it relate to the trade size?
This post will explain the concept of trade size in Forex, how it’s measured, and how to calculate a trade size in your trading software.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
The Risks of Forex Trading
Forex traders require leverage, and traders will also use margin, so there are risks involved. Currency prices fluctuate but not by a huge margin, so traders often need leverage to execute a trade. If the trader makes a winning bet, the leverage can help maximize the profits.
However, the leverage can also increase the losses. If the value of a specific currency falls significantly, traders that rely on leverage open themselves up to margin calls, which can force them to sell off their securities. Other than losses, transaction costs can also reduce the profit.
To become a successful Forex trader, you need to be skilled and extremely sharp, as there are many obstacles, and the risk of fraud and misinformation is high.
Size of Lot in Forex
Most traders that start trading at Forex are usually unaware of terms like Lot. However, these terms are important, as any changes can have severe consequences. Traders must understand lot sizes to avoid mistakes while trading.
Lots are the value of currency units that traders trade. For example, previously, only specific amounts of spot forex was traded, so it was called lots. Few years back, lots were used to standardize units while trading large capital. Usually, standard size of lot is 100,000 currency units, so one lot of EUR/USD is worth 100,000 Euros.
Nowadays, due to leverage the brokers offer the trader a loan based on the margin you put forward. Leveraged trading has opened up the market to more lots, and you can start trading with $ 100. Below we have discussed different lot sizes:
- Lots (Mini)
This Lot is for the tens of thousands category. One mini lot: 10,000 currency units, Two mini lots: 20,000 currency units.
- Lots (Micro)
This Lot is for the thousands category. One micro Lot: 1000 currency units, Two micro-lots: 2000 currency units.
- Lots (Nano)
This Lot is for the hundreds category. One nano lot: 100 currency units, Two nano lots: 200 currency units.
How to Calculate Lots?
The great thing about standardization is that you don’t need to learn how to calculate lots in Forex. There is already a formula available, and you need to plug in the values:
Value of Lots * 100,000: number of lots
One lot * 100,000: 100,000 units
Two mini lots (0.2) * 100,000: 20,000 units
Five nano lots (0.005) * 100,000: 500 units
The formula is straightforward, and the calculations will be done by the broker. The trader only needs to be aware of the amount of trade and the value of the pip based on the size of the Lot. Use this formula to find out the pip value:
- (Current rate.pip value) * lot size.
The pip value for most currencies is 0.0001, and below we have discussed an example:
Value of pip: four places behind the decimal place/1.1660 * 1 lot (100,000 units). In this scenario, if the market moves ten pips in your favor, your total profit will be 116.60 dollars.
Similarly, in a mini lot, the units will become 10,000 from 100,000, value of pip: four places behind the decimal place/1.1660 * 1 lot (10,000 units), 0.001 * 10,000: 1.16 dollar/pip.
Let’s do this example with the USD/JPY currency paring:
The USD/JPY currency pairing value is 0.01, so let’s bring in the formula (pip value: two decimal places behind/121.90) * 1 lot (100,000 units). The answer will be 8.20 dollars/pip.
How much is 0.01 Lot?
0.01 is considered a macro lot in Forex, which is roughly 1000 currency units. The pip value for a macro lot is 0.10 dollars (EUR/USD pairing), and this is the value at which most beginners start at Forex.
This value gives you some margin; you can risk some capital. Experts say that new Forex traders should move to this trading size rather than start with a demo account.
How much is 0.1 Lot?
0.1 is considered a mini lot, which is about 10,000 currency units. The pip value for a mini lot based on the EUR/USD currency pairing is 1 dollar. Traders who use this Lot adapt to the market and take more risks to grow their capital.
How much is 1 Lot?
One Lot in Forex is 100,000 currency units, and the pip value for this Lot is approximately 10 dollars, based on the EUR/USD currency pairing. Traders who use this lot size are usually experienced and can afford to take risks. This trading lot is considered the standard size worldwide.
How much are 5 Lots?
Five Lot in Forex means 500,000 units of currency; the pip value for one Lot is about 50 dollars, based on the EUR/USD pair. Traders that trade in this lot size usually have a large trading account and can afford to take big risks.
How much are 10 Lots?
Ten lots equal 1000,000 currency units; the pip value for this Lot is about 100 dollars, based on the EUR/USD currency pairing.
Forex Trading PIP Spread
The spread measurement is done in PIP, a small movement in the value of the currency pair price, and the last decimal point is 0.001. However, the Japanese Yen is the only currency where the decimal point is 0.01. Therefore, a wider spread indicates a greater difference between the two prices.
A wider spread indicates high volatility and lowers liquidity, whereas a lower spread indicates lower volatility and higher liquidity. Therefore, when trading a currency pair with a tight spread, the trader will pay a spread cost.
While trading Forex, the spread will either be fixed or variable. The spread for forex currency pairings is variable, so when the price of the pairing and the bid change, the spread changes.
Conclusion
In this article, we have thoroughly discussed what trade size means in the Forex market. Not only that, but we have also given a brief explanation of what Forex trading is and the risks associated with it. We have also mentioned in this article different lot sizes, how to calculate them.
We have also given two types of formulas in this article:
- For calculation of lots
- For calculation of pip value
We hope this article clarifies confusion because trading in the Forex market is not easy, and traders are always looking for helpful and accurate information.