Before trading any asset, knowing the amount of money you have reserved for the position is necessary. Thus, finding an appropriate lot size may help you optimize positions. It helps you to consider the risks and expected returns.
You can have formulas to calculate lot siz in forex. However, this may be unnecessary since forex trading platforms will do this job for you. You only need to choose the currency pair and enter the position.
But before you enter any position, you must do many other things. For instance, you need to determine acceptable risks and losses. The profit targets you chose to determine the acceptable losses. Therefore, the more profit, the greater the risks you must take.
Typically, the value of the lot size you choose is determined by the platform or a market regulator. The lot size ensures that every person trades a determined amount and knows the exact volume of the asset they will trade when opening a position.
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Lot sizes
The four common lot sizes are nano, micro, mini, and standard. They are meant to give the trader some control over their trades. It may not be impossible to buy a single unit of currency, so the currencies are packaged in sizes called lots. The lots come in sizes that are universally accepted. Thus, you may buy a standard-size lot of GBP, say 100,000 units, or buy a micro lot equivalent to 1000 units.
How Much Is One Lot?
The size of the lot in forex depends on whether you are trading a nano, micro, mini, or standard lot. Thus, the measurements or the lot size helps one account for changes in the currency’s value.
For instance, you may decide to pair EUR/USD. The Euro is the base currency, while the dollar is the quote currency. In this case, the trader speculates that the Euro will strengthen against the US dollar, and so if the current quote price is $1.3000, it implies that One euro will exchange at $1.3000, and thus a trader needs $1.3000 to buy €1
Therefore, if you chose a standard lot size, it means you will be buying or selling 100,000 currency units. If the exchange rate is $1.3000, the standard lot size of the Euro in this example is 130,000 units. You need 130,000 units of USD to enable you buy 100,000 units of euros.
Mini Lot Size
It is one-tenth of the standard lot size. Consequently, a mini lot is equivalent to 10,000 currency units. So if you chose this lot size, the profits or the losses you make in every trade you place would be lower compared to a standard lot.
Accordingly, assuming that the exchange rate for EUR/USD is $1.3000, the mini lot for the base currency is 13.000 units, so one needs 13,000 units of the quoted currency to be able to buy 10,000 units of euros.
Micro Lot
A micro lot is one-tenth the mini lot size meaning that it is 100 units of a currency. Micro lot thus requires less leverage meaning that any swing will not have a big financial impact like the standard and mini lots.
Therefore, if the EUR/USD exchange rate is $1.300, the micro lot of Euro would be 1,300 units. It implies that at the current price, one needs 1,300 units of the USD to buy 1000 units of euros.
Nano lot
It is one-tenth of the micro lot and is equivalent to 100 units of any given currency. So a pip movement of the currency will be equivalent to 0.01 units of your base currency. Thus, if you are trading EUR/USD, it could be €0.01.
As such, if the EUR/USD rate is $1.3000, the nano lot of the EUR, in this case, will be 130 units. Hence you need about 130 units of the USD to buy 100 units of Euro.
Final Thoughts
Luckily, you may not need to calculate the lot size because trading platforms do the donkey work for you. Besides, they will tell you the lot size you can use depending on how your account is capitalized. This enables you to calculate the position size by looking at the lot size and the number of lots bought.
