If you’ve ever wondered, “What is a lot size in Forex trading?” then read on.
We’ll explain what a lot size is, why it matters, and show you exactly how to calculate your lot size and decide on the correct one when trading.
Consider opening a trading account to apply your knowledge and see how Forex lot sizes work in a simulated or real environment.
Forex lots explained
If you are new to Forex trading, the number of terms and jargon that you need to learn can be overwhelming. Understanding what a lot is in Forex trading is basic but a crucial part of your education. Because lots are an important factor in determining your risk and the potential reward when you trade.
We will get to this in just a moment, but let’s start with a simple explanation so you know what a “lot” is.
What is a “lot” in Forex?
When you decide to buy or sell in the forex market, you are placing a trade. It is the activity of exchanging one currency for another. The amount of money that is exchanged in your forex transaction is known as a lot.
lots in Forex trading refers to the size, volume or quantity of currency traded and is otherwise known as the contract size. Lots are specific amounts that you trade and denote the contract size’s face value. Just like gold is traded in kg’s or ounces and petrol is traded in terms of liters, currency is bought and sold in terms of lots. That is simple enough to understand right?
Lot sizes are often expressed in terms of standard, mini and micro lots. With the former being larger than the latter.
So, now let’s look at how lots work in Forex trading.
How do lot sizes work?
As you enter your trade, you may be wondering how much money you are trading or how much is required to buy the currency pair. The answer is; it depends on the lot size you select before executing the deal. There are different lot sizes or quantities you can trade and each will be worth a different amount.
A standard lot is the equivalent of trading 100,000 units of the base currency. Then there are mini and micro lots, which are 10,000 and 1,000 units of the base currency respectively.
For example, if you wanted to buy the EURUSD and trade 1 standard lot, you would be buying 100,000 euros (which is the base currency) by selling the equivalent amount in US Dollars. So if the EURUSD exchange rate was 95 US cents to the euro, you would be selling $95,000 to buy €100,000 (1 standard lot).
It is important to note that the lot size directly impacts and indicates the amount of risk you’re taking. In other words, the lot size determines how much you could potentially make or lose for each pip the price moves up or down. So in this example, trading one lot in the EURUSD currency pair means that for each pip the exchange rate fluctuates, up or down, you will profit or lose $10.
A summary of trading one lot in the EURUSD
If you want to buy 1 lot in the EURUSD at 1.0500, you would be exchanging the equivalent amount in US Dollars to buy €100,000. For this lot size, each pip would be worth $10 and depending on how far the price moves, it will determine how much you would profit or lose. If the price was to go from 1.0500 to 1.0600, you would profit 100 pips x $10 or $100. Alternatively, if the price was to go from 1.0500 to 1.0400, your loss would be 100 pips x $10 or $100.
You can of course trade smaller lot sizes and the amount required to open the deal will be far less than this. Because Forex brokers allow you to trade using leverage. Which means that you only need to put up a small margin of the trade amount to open the trade.
With that being said, each lot size has a different pip value.
Common Forex lots sizes and their pip values
I will explain how the pip value for each lot size is calculated in just a moment. And also point you to a pip value calculator so you can work things out much easier. However, pip values are easy to remember so I will list the most common Forex lot sizes and their pip values here.
|Lot||MT4 / MT5 Volume||Amount To Trade (Units)||PIP Value (Approx.)|
You can also trade variations of these lots size such as;
|MT4 / MT5 Volume||Amount To Trade (Units)||PIP Value (Approx.)|
These lots size and the corresponding pip values should be easy enough to memorize. Just by knowing the approximate value of a pip for a standard, mini and micro lot. You can work out what it would be when trading 2 standard, 2 mini, several micro lots or any other lot size combination.
If you would like to know more about the math involved in calculating all of this, then keep reading as it follows below.
How to calculate PIP value in Forex trading
You will often hear the term “PIP” when you are trading Forex. A pip is a unit of measure for the price movements of currency pairs. PIP is an abbreviation for “Percentage In Point” and represents the 4th decimal place in the price quote for major currency pairs. The 5th decimal place is referred to as a point and this is 1/10th of a PIP. The point or 5th decimal place exists to provide a more precise rate of exchange
For currency pairs involving the Japanese Yen and also for commodities such as gold and crude oil, the pip is in the 2nd decimal place.
The pip value is calculated by taking the price of a pip and multiplying it by the lot size and dividing that by the market price. This gives us an idea of how much money you will make or lose on each trade based on how much you are trading. Here is the formula;
PIP value = (1 PIP x lot size) / exchange rate
This is how to calculate the pip value for trading one lot on the EURUSD;
(0.0001 x 100,000) / 1.0500 = €9.52
As the base currency is in euro, the pip value is also expressed in euros. This can then be converted at the current EURUSD exchange rate to work out what the pip value would be in terms of US Dollars.Which would be;
€9.52 x 1.0500 = $10
You can convert this to any other rate of exchange
Let’s take a look at another example with a different lot size and currency pair.
This is how to calculate the pip value trading one micro lot on USDJPY
(0.01 x 1,000) / 130.00 = $0.08
The base currency in this example is the US Dollar, so the pip value is expressed in terms of US Dollars.
Why choosing the correct lot size matters
It’s important to choose an appropriate lot size when trading because it can mean the difference between risking too much or too little. The choice between small and large lots also has an impact on your profitability. When you trade small lot sizes, the risk will be small but so too will the rewards.
The lot size you choose is the amount of money you want to trade and this is directly related to the pip value. When you know this, it makes position sizing easier but there are a couple more variables in the equation that you must know to trade the correct lot size. These are, how much you are prepared to risk on the trade idea and how much adverse price movement you are prepared to accept before stopping the trade. When you know these, you can calculate the pip value and what lot size you should be trading.
Here is the formula to go about choosing the correct lot size.
Amount to risk / risk in pips = pip value
Let’s look at an example.
Let’s say that you want to risk $100 trading on the EURUSD and intend to put a stop loss 50 pips away from your entry price. Using the formula above, you can work out the pip value as follows.
Now that you know the pip value, you can work out the corresponding lot size. The lot size you should trade, should have a pip value of no more than $2 in order to not exceed the $100 risk So going by the table above, it would be 2 mini lots.
You could rearrange the pip value formula too, to work this out but there are easier and more convenient ways to do it. Such as remembering the pip value for standard, mini and micro lots, or using a pip value or lot size calculator.
Forex PIP value and lot size calculator
A pip value and lot size calculator can help you calculate what lot size you should be trading easily enough. As a beginner or if you are unsure, you can use this tool to better manage your risk when trading different instruments.
TIOmarkets provides a pip value calculator that allows you to select the instrument and lot size to automatically work out the pip value.
You can use this to ensure you are not trading too much or too little volume for any given trade idea.
What is the biggest lot size you can trade in Forex?
Forex provides practically unlimited opportunity and profit potential. The larger the lot size, the more you can potentially profit (or lose). However, there is a limit to the number of lots you can trade on the platform.
With TIOmarkets, you can trade up to 50 lots per trade and have up to 200 open or pending orders at any one time. In monetary terms, this is $5 million dollars per trade, and up to $1 billion in open positions. In case you are interested, the pip value for each would be $500 and $100,000 respectively.
What is the minimum lot size you can trade?
Most people don’t have the necessary capital to trade in such large amounts. So the limitations of the platform should be more than adequate for your trading needs. What is more common for the average trader is to gravitate towards standard, mini and micro lots.
The minimum amount you can trade with TIOmarkets is one micro lot, or $1,000. The pip value in such a case would only be about $0.10, so the risk is minimal.
Forex lot sizes are directly related to the pip value. The value per pip, multiplied by the distance the price moves determines how much you will profit or lose on your trade. Trading lot sizes that are too large or too small will have a direct impact on your profit or loss. This is why it is crucial to choose the correct lot size for your account size and tolerance to risk.
Now put your knowledge to the test, open a trading account to see how Forex lot sizes work in a simulated or real trading environment.
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