When you trade forex, you're trading a unit of a currency pair against one another. However, you can't trade only a unit of currency pair- it must be in a trading lots.
A lot is the number of quoted currency pair units you buy and sell in the forex market. The bigger your lot is, the higher the return you'll get.
Your position's lot size and the market movement can make or break your trading account—but the great news is you have direct control over it.
Lesson Highlight
- Forex traders don’t trade a single unit of a currency pair. They open a position in a lot, which is a specific number of currency pair units.
- Position lots are categorized into four sizes, the Standard, Mini, Micro, and Nano.
- Forex traders look at their position size and their position’s pip value to calculate their potential profits.
Four Main Lot Sizes
Your position or trade size depends on your strategy or account's capacity. If you have a healthy trading account, you can risk having a standard lot size.
But if you can't afford significant risk, you can choose to trade a micro and nano lot size.
Let's use the Ferrero Rocher analogy to understand the lot sizes in forex better.
John and his family have a tradition of buying a box of Ferrero every Valentine's Day. However, he noticed his wife was building up a fever. While he doesn't want to risk his wife's health, he also doesn't want to disappoint his kid.
When he went to the market, he found that Ferrero actually offers different sizes of their Ferrero Rocher. He decided to buy a box of 9 chocolate balls instead of the standard 24 chocolate balls.
This way, he minimized the risk while keeping his family's tradition.
Essentially, you must consider your risk tolerance and account capacity when choosing the right lot size. Here are the four main lot sizes when you trade forex.
1. Standard Lot
The standard lot size when trading forex is 100,000 units.
A standard size is the biggest currency unit you can trade in forex. This position size opens you to profitable opportunities, but in return, it magnifies your position's risk.
Example Computation:
Assume you're trading a unit of USD/JPY at 142.05 with a position size of 100,000 units. Essentially, you're buying 100,000 units of USD with 1,420,5000 units of JPY.
2. Mini Lot
The mini lot size is 10% of the standard lot, which is 10,000 units. It promotes both profitability and affordability.
This position size is mainly advised for starting traders. Opening trade with a mini lot allows you to get familiarized and gain with the market movement without risking your capital.
Example Computation:
Imagine you open a position in EUR/USD at 1.0959. In this case, you'll need $10,959 to buy €10,000 and enter the trade.
3. Micro Lot
The micro lot is the smallest position size you can offer – conventionally! (Note: There is still a nano lot, which is somehow uncommon in the forex market)
This position size has 1,000 units of the currency pair you wish to trade. This position allows you to access the forex market and control your trade.
Trading with micro lot size can benefit both novice and experienced traders.
- Beginner traders have to expose themselves to forex trading with minimum investment.
- Experienced traders can test out trading systems and strategies in the real forex setting.
Example Computation:
Say you want to open a position in GBP/USD at 1.2639. If you open it with micro lot size, your account must have $1263.9 to buy £10,000.
4. Nano Lot
At some brokers, traders can open a position with the size of a nano lot. This position size only has 100 units of the currency pair you want to trade.
But remember, not all brokers offer nano lot as it doesn't open traders to profitable opportunities.
Example Computation:
Assume you open a nano position in USD/CAD at 1.3329. In this case, you need to have 133.29 units of CAD to buy 100 units of USD.
Pip Values and Lot Sizes
In the previous lesson, you’ve learned what pip or point in percentage is. To recall, this is the smallest movement of the currency pair’s exchange rate.
And remember, knowing your position’s pip values helps you with calculating your profit or loss.
Say you opened a position in EUR/USD at 1.2017 and closed it at 1.2019, your position experienced a two- pip movement. In result, your trade gained profit because the pip rises.
Now, let’s look at how you can use lot sizes to figure out your position’s pip values.
Imagine this scenario:
Prince opened a position in USD/JPY at 142.64 with a position size of standard lot (100,000 units). To open this position, he needed to have 14,264,000 units of JPY to buy 100,000 units of USD.
One minute, he noticed that the market keeps going downward. Afraid of having bigger losses, he decided to close his position at 142.63.
This trade experienced a 1-pip movement. Given that he opened a standard lot size, his account loses $7.01 through this trade.
But how did we come up with this pip value? We simply divide the pip (0.01) to the current exchange rate (142.63) and multiply it to the units traded (100,000).
(0.01/142.63) x 100,000 = $7.01.
Leverage Trading
Okay, let’s get back to Prince’s situation. He opened a standard lot in USD/JPY at 142.63, which is around 14 million Japanese yen or 100,000 USD.
You might ask, “How on earth did he manage to trade such amount?!”
But truth be told, he actually did not deposit that much money in his position. He used margin trading and maximized the broker’s leverage.
Margin trading is basically when the broker requires you to deposit a certain amount, which is relatively smaller than the position you want to open.
Say Prince used a leverage of 1:100, it means that his broker requires him to deposit $1,000 to control $100,000 worth of position.
So, trading a position with a large notional value does not really call for you to invest that much money. All you have to do is to leverage your trade. For the next lesson, you’ll see how spread works when you trade forex.
