With so many different Forex terms and abbreviations, it is easy to get confused and lost especially if you are new to the Forex world. But it does not need to be this way. In this article, we will discuss a Forex term that you may or may not know. Lot sizes. Forex trading does not need to be intimidating or scary and everyone should have a chance to experience this fascinating world of finance and trading. Let us get into it.
Meaning of the Term Lot Size
This is one of the first key terms in Forex trading that everyone in Forex trading should have a good understanding of. Lot sizes in Forex trading can have a direct influence on the risk that you as the trader are taking. Even if you have the best plan and strategy, you will fail if you do not understand how to use Lot sizes.
It is a method of determining how many currency units are required for a trade and it is the smallest available trade size that a forex trader can place. The lot size that you are trading with has a direct impact on how much a move in the market affects your trading account. So, how bigger the lot, the bigger the profits but also the bigger the losses. So, this can have a major effect on your trading strategies and risk management.
Why Lot Size Matter
Finding the lot size that best balances opportunity and risk is a very important individual decision. Using a tool like a risk management calculator can help you clarify your decisions about lot size, but you should do so by factoring in your own risk tolerance and your trading objectives. The trading lot size directly impacts how much a market move affects your accounts. For example, a 100-pip move on a small trade will not be felt nearly as much as the same 100-pip move on a very large trade size.
That is why it is important to select the proper lot size. A Lot size that is too large will make the trade riskier and more uncomfortable to hold on to. A lot size that is too small might not generate enough potential gain to be worthwhile. Source: The Balance
Types of Lot sizes
There are four main types of lot sizes you will come across when trading in the forex market, namely: standard lot, mini lot, micro-lot, and nano lot. Let us have a look at each of these.
- Standard lot: It is one of the most commonly known and popular lot sizes. It is the equivalent of 100,000 units of the base currency in a forex trade. A standard lot corresponds to 100 000 units of the base currency in a quote of currency pairs. Put in other words, 100 000 units = 1 lot.
- Mini lot: Most forex traders you come across are going to be trading mini lots or micro lots. It might not feel glamorous, but keeping your lot size within reason relative to your account size will help you preserve your trading capital to continue trading for the long term. A mini lot equals 10% of a standard lot (100 000 x 0.10) = 10 000 units of a base currency. Thus, when you open a trade with a 0.10 lot, you will trade 1 mini lot. It is a great choice for those forex traders who may want to trade with a lower, or perhaps no leverage at all.
- Micro lot: This is a good choice for beginners that are starting out and it is the smallest tradable lot available. A micro lot is 1% of a standard lot (100 000 x 0.01) = 1 000 units of a base currency. Therefore, when you open a trade with a 0.01 lot, you will trade 1 micro lot.
- Nano lot: It is also known as a cent lot and has 100 currency units. They are not used much but beginner traders and traders who are trying new strategies use them occasionally. This can be an excellent strategy for a beginner trader for the first few weeks of trading, just in order to avoid big losses.
It is also a good idea to try to educate yourself as much as possible. It does not matter whether you are a beginner or have been trading for years. An academy like FX Goat can help you to learn more about forex trading and terms that you are not familiar with and help you to understand the exchange rate better. If you want to keep your eyes on the market and know what is happening at all times, you can use the Trading View or DailyFX app. This will allow you to access real-time quotes and charts anywhere and anytime!