FOREX

What is the Standard Forex Lot Size? • Benzinga – Benzinga


Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com or IG.

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.

What is Forex?

The foreign exchange, shortened as forex or FX, is exchanging one currency for another.

If you ever traveled abroad, the chance is that you had to exchange your money into a local currency. That is forex trading in essence, although fees usually prevent you from making any profits.

Forex rose to prominence in the 1970s, after the U.S. dollar (USD) severed its last ties with gold as a pegged currency. Since currencies started to trade at floating rates, forex became a decentralized global marketplace — operating 24/5 through an electronic network of international banks, brokers and other financial institutions.

The growth of information technologies in the ’90s fueled the online broker boom. While the early electronic platforms were barely better than a telephone, as the software capabilities grew, so did the volume. Electronic brokering went from 5% in 1992 to over 60% by 2001. Nowadays, forex is the largest market in the world, with $6 trillion in volume every day.

What is a Forex Lot?

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 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 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:

  1. 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.
  2. 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.
  3. 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.
  4. Trade volatile currencies. 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.

Benzinga’s Best Forex Brokers

Speculating on the currency market is the easiest through forex brokers — regulated financial intermediaries that execute trades on your behalf. You can check the list of our recommended brokers in the table below.

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.

Answer Link

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.

Answer Link

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