The post What is the Standard Forex Lot Size? by Stjepan Kalinic appeared first on Benzinga. Visit Benzinga to get more great content like this.
No matter how much you might dream about large returns on small trades, in reality, some of the biggest winners collect moderate returns trading at a large size.
Yet, trading large sizes is not for the faint of heart. It requires experience and sound risk management before jumping at the deep end of the market.
Read on to learn more about how to calculate volume on the forex markets and avoid common mistakes while doing so.
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What Are Lots in Forex?
Just like you might buy your fuel by gallons, when you are trading you are using lots for measuring the transaction amount.
By default, 1 standard lot equals 100,000 units of currency. Additionally, other sizes commonly referred to are a mini lot (10,000 units), a micro lot (1,000 units) or nano lot (100 units).
However, when planning a trade, the main question is not the size itself but the position size in relation to value. While other asset classes (like stocks or commodities) can move several percentage points in a single day, the forex market is less volatile. Thus, its moves are measured by percentage-in-points or pips.
Because forex pairs trade as different ratios, although a lot size is always fixed, its value per pip is not. To find that value, you can do calculations like in the following example.
If the U.S. dollar is the 1st quoted currency:
- USD / JPY trading at 109.500: (0.01 /109.500) x 100,000 = $9.13 per pip
- USD / CHF trading at 0.9071: (0.0001 /0.9071) x 100,000 = $11.02 per pip
If USD is quoted the 2nd, then we need to multiply the ratio with the price again:
- GBP / USD trading at 1.3905: (0.0001 / 1.3905) x 100,000 = 7.19 x 1.3905 = $10 per pip
- EUR / USD trading at 1.1838: (0.0001 / 1.1838) x 100,000 = 8.44 x 1.1838 = $10 per pip
For the sake of simplicity, these pip values per single lot are denominated in U.S. dollars. If your account is in another currency, then these numbers would be different.
How Does a Forex Lot Size Impact Your Trading?
In the examples explained above, you could see the calculations for pip value per 1 round lot.
Although the size ultimately decides your potential profits, it is value per pip that is the main driving factor behind determining what size to use.
Any serious forex strategy, regardless of the approach, needs to have sound risk management. Trading without a stop-loss is like playing with an active bomb — you might be fine 99 times out of 100, but it is that 1 time that blows your account. Thus, you have to use a stop loss, and because its concept is measured in distance, it will be measured in pips.
Because the size of your account is measured in currency, choosing either a percentage of your account as risk or a fixed amount will require a rough value per pip calculation.
Finally, this is how you get the lot size you will use for your trade.
Consider an example below:
AUD / USD, August 4, 2021 Source: TradingView
Let’s say you decided to sell AUD/USD. You have observed that the U.S. dollar is rallying aggressively and the market 0.74100 as support. After the price broke and closed below, you decided to enter a sell position at 0.74070.
With the price action analysis, you decided that the stop-loss needs to be at least 0.74200 because that is the nearest meaningful resistance above the market. If you want to have a maximum risk of $50 per trade, what is the lot size you should use for this trade?
Your account is in USD, so as a quick trick, you can divide 50 by 13 to get the answer in mini lots. That will be 3.84 mini lots or 0.38 standard lots.
Furthermore, if you set your take profit at 0.73600 (the previous low), your maximum profit will be $180, giving you an excellent reward-to-risk ratio of 3.6:1.
How Do You Make Money on Forex Trading?
Here are the 4 most valuable tips for making money on forex trading:
Find Your Style
While there are different ways to trade, the odds are some will suit your personality more than others. If you thrive in a high adrenaline environment, you will likely love trading in a small time frame. If you’re more of a strategist, you will probably prefer larger time frames, looking at the big picture.
Beginner traders should first consider their risk tolerance, trading strategy, and account size when selecting trading lots and base currency pairs like EUR/USD.
Use a Stop-Loss
Trading without a stop-loss is simply asking for trouble. Things can go wrong and one accident can destroy your account. Always have a plan on where to put the stop-loss before you enter the trade. A rule of thumb is to use at least 10% of the average true range (ATR) if you’re unsure.
Have Realistic Expectations
The forex market is dynamic, but it is not a get-rich-quick scheme. Your profit expectations have to be realistic relative to the time frame you are trading on.
Trade Currencies
As a forex trader, you must have basic knowledge of the currency pair that you choose to trade, which includes the base currency, the quote currency, and the exchange rate between them.
Price has to move for you to make money. Naturally, you should prefer the currencies that move a lot, preferably over 65 pips per day. The easy way to filter this is to keep track of the ATR indicator.
Forex trading is a vast topic that requires in-depth research. For more information, you should visit Benzinga’s guide on how to make money on forex.
Benefits of Large and Small Forex Lots
A major benefit of forex is that it requires a small amount of capital to start. You can trade live markets with as little as a few hundred US dollars. The minimum will depend on the broker of your choice. It is ideal for those who want to slowly scale in, increasing the account as you gain knowledge and experience.
On the other hand, your ultimate goal should be to trade larger lot sizes to bring larger profits. One of the greatest strengths of the forex market is its liquidity. Regardless of your trade size, the forex market can absorb incredible money without moving the price.
Pro Tip: A position size calculator can help in determining the appropriate position size to take.
Benzinga’s Best Forex Brokers
Speculating on the currency market is the easiest through forex brokers — regulated financial intermediaries that execute foreign exchange trades on your behalf. You can check the list of Benzinga’s recommended forex brokers in the table below.
FOREX.com is a one-stop shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker.
Best For
- MetaTrader 4 users
- Beginner forex traders
- Active forex traders
- Impressive, easy-to-navigate platform
- Wide range of education and research tools
- Access to over 80 currencies to buy and sell
- Leverage available up to 50:1
- Cannot buy and sell other securities (like stocks and bonds)
IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.
Best For
- New forex traders who are still learning the ropes
- Traders who prefer a simple, clean interface
- Forex traders who trade primarily on a tablet
- Easy-to-navigate platform is easy for beginners to master
- Mobile and tablet platforms offer full functionality of the desktop version
- Margin rates are easy to understand and affordable
- Access to over 80 currency pairs
- U.S. traders can currently only trade forex
- Customer service options are lacking
- No 2-factor authentication on mobile
HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.
HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service.
Best For
- Investors who want a customizable fee schedule
- Traders comfortable using the MetaTrader platform
- Islamic traders who need swap-free accounts that don’t build interest
- Mobile app with a simple trading experience
- Wide range of currency pairs available
- Excellent selection of educational tools
- Not currently available to traders based in the U.S.
86% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Plus500 is a European derivatives broker focusing on contracts for difference (CFDs). CFDs are similar to binary options in the U.S. where traders take all-or-nothing speculation on the prices of certain securities like indices, commodities or currencies. While not legal to trade in the U.S., CFDs are legal in many jurisdictions across the globe and Plus500 offers a wide array of tradable markets using these instruments.
Plus500 doesn’t charge commission and only profits off the spread, which is the difference between the buy and sell price of a specific security. But Plus500 is not a broker for beginners — the education materials are sparse and CFDs are risky derivatives capable of sapping out all of an investor’s capital. Only trade these instruments if you understand how they operate and the risks involved with buying them.
Best For
- Traders looking for a smooth mobile experience
- Great mobile app
- Low spreads and commissions
- Unlimited demo account
- Only derivatives are available
- Not open to U.S. residents
Billing itself as the world’s 1st eco-friendly broker, CedarFX makes it easy to trade and give back to the planet. You can choose a 0% Commission Account or an Eco Account — or open multiple accounts to meet all your needs.
CedarFX offers access to a wide range of tradable securities, including stocks, futures, major and exotic forex pairs, cryptocurrencies and more. Though CedarFX could introduce a few additional educational resources, the broker remains a unique option for traders invested in giving back.
Best For
- Forex investors
- Investors interested in 0% commission or eco conscious trading
- Investors looking for 24/7 customer service
- Allows users to offset their carbon footprint
- 0% commission investing
- Offers demo account access
- 24/7 customer service available through live chat
- Eco Account Option (10 trees planted for each lot traded)
- Fast deposits/withdrawals with Bitcoin
- Limited number of educational resources for new investors
Standard Accounts: $1,000
Founded in 2006, IFC Markets is a popular forex and contracts for difference (CFD) broker that provides high-quality trading services to over 185,000 clients from more than 80 countries. The broker has oversight from the British Virgin Islands Financial Services Commission (BVI FSC) as well as the Labuan Financial Services Authority (LFSA) in Malaysia.
IFC Markets offers trading in over 600 financial instruments including forex stocks indices commodities cryptocurrency futures and synthetic assets through excellent trading platforms: MetaTrader 4 and MT5, and its own developed NetTradeX advanced platform. IFC Markets also gives clients unlimited trading opportunities via its unique GeWorko Portfolio Quoting Method that lets traders create their own synthetic instruments or choose from PCI Library synthetic instruments created by professionals.
Best For
- Traders who want to create their own trading instruments
- Intraday and mid-term traders
- Small volume traders
- Trading platforms variety
- The GeWorko Portfolio Quoting Method lets you create synthetic assets
- 15 years experience in the business
- Highly rated by clients with 8 recent international awards
- Insured by AIG Europe Ltd.
- Only regulated by 2 minor agencies
- Not available to traders in the U.S., Japan and Russia
A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.
Best For
- Beginners
- Advanced traders
- Traders looking for a well-diversified portfolio
- Controlled by regulatory agencies of multiple countries
- Choice offered in terms of trading platforms
- Support available in 14 languages and trading platforms in 20 languages
- Practice/demo account available for trying out
- Breadth of trading assets
- Does not accept customers from the U.S. as it isn’t regulated in the U.S.
- Transferring funds to the account may take up to five days; withdrawals could take up to 10 days
Forex Lot Size Matters
Deciding on an adequate lot size is another in the line of important decisions when planning a forex trade. Yet, it is one of the most important ones as it is directly linked to risk management.
Dealing with lot sizes can be confusing, especially if you manage more than one account in different base currencies. In that case, you should compose a cheat sheet table with values per pip to help you plan the trade.
Finally, trading at a large size should not be rushed. It should have the same treatment as weightlifting. If you increase the weight too fast, you will likely suffer an injury. Thus, increasing the trading size should have the same approach, one small step at a time.
Frequently Asked Questions
What is a 10 lot size in forex?
Since 1 lot equals 100,000 units of the underlying currency size, 10 lots would equal 1,000,000 units.
By trading USD pairs at that size, 1 pip (percentage in point) would equal roughly $1,000 for an account nominated in U.S. dollars.
How many dollars is a 0.01 lot size?
Also known as a micro lot, 0.01 lot equals 1,000 units of currency. Therefore, for any U.S. dollar pair, like USD/CHF, 1 pip move at 0.01 lot would equal a price change of $0.1.
One micro-lot is often the smallest position a currency trader can take and it is a great way to gain live market experience.
The post What is the Standard Forex Lot Size? by Stjepan Kalinic appeared first on Benzinga. Visit Benzinga to get more great content like this.
