Now, we are discussing the lot size, it is the very important topic, but most of the trader doesn’t give enough time to understand Forex Basics and bear a lot of loss. Before taking any step, the trader should know their portfolio because of the lot sizes directly impact the risk you want to take. Hence, finding appropriate forex lot size according to your trade can help you lock down the risk you would be taking. In the earlier period, spot Forex was only traded in definite amounts that known as lots, or basically the total number of currency units you will sell or buy.
Without wasting any time, now we are describing the lot size type.
There are 4 types of Lot size available
1) Standard Lot Size:- 100,000 units of currency
2) Mini Lot Size:- 10,000 units of currency
3) Micro Lot Size:- 1,000 units of currency
4) Nano Lot Size:- 100 units of currency
Here, you need to understand the “Pips”, it is the smaller change or “Basic change” in the currency value relative to another currency, or we can say “very small percentage of a unit of currency’s value”. Pips depend on our lot size, a pip movement will have a special monetary value.
To get more understanding, go to our article “What is PIPS”.
To take benefit of the relatively small change in the exchange rates of currency, we require trading large amounts in order to view any important profit or loss.
So we take an example for better understanding. We have chosen to BUY a standard-lot of 1, 00,000 units of the EURUSD.
So what we are effectively doing is buying €1, 00,000 worth of US Dollars at the exchange rate 1.36817. We are analyzing the exchange rate to increase (i.e. the Euro to make stronger against the US Dollar) so we can close out our position on a profit.
So let’s say the exchange rate changes from 1.36817 to 1.37817 –the exchange rate rose by 1c ($). This is the equivalent of 100 pips.
So with a lot size 1, 00,000, each pip movement is $10.00 profit or loss to us (100,000* 0.0001 = $10.00).
As it moved upwards by 100 pips we made a profit of $1000 or downward by 100 pips, so we made a loss of same $1000.
For example’s sake, if we opened a lot size for 10,000 units we would have made a profit of $100.
Therefore lot sizes are crucial in calculating how much of a profit (or loss) we build on the exchange rate when movements of currency pairs.
How to Calculate Effective Pip Value using Forex Lot Size:
For our examples shown below, let’s assume we will be using the standard lot size (100,000 units) and the micro lot size (1000 units).
We will now determine some trade examples to understand how it impacts the pip value.
If USD is base currency:
USD/CHF = 1.3850
1 Pip value: (0.0001 / 1.3850) = $0.0000722
1 pip value for forex standard lot size: $0.0000722 x 100000 units = $7.22
1 pip value for forex micro lot size: $0.0000722 x 1000 units = $0.0722
1 Pip value: (0.01 / 122.38) = $0.0000817
1 pip value for forex standard lot size: $0.0000817 x 100000 units = $8.17
1 pip value for forex micro lot size: $0.0000817 x 1000 units = $0.0817
As seen above, lot size directly affect your account based on how much the forex market fluctuate. A 10 pip change on a smaller lot size will have much less impact than a fifty pip change on a higher lot size.
Conclusion: – Most forex traders only trade in mini lots or micro lots. Here, it might not sound very good, but practically it is safe. In the initial stage, keeping your lot size small that strategy helps you to stay in the market for long term.