The greater the volume of one lot in Forex, the greater the risk. Risk assessment risk management includes a model that allows you to calculate the optimal amount of standard lot in the foreign exchange markets based on the estimated risk level, volatility stop loss level , and leverage.
Position Sizing Tutorial For Forex Traders -
In the usual sense, a lot is a standard unit for measuring the volume of a currency position opened by a trader. That is the amount of money invested in the purchase of a currency in order to sell at a higher price later. Lot calculation is an element of the risk management system. It is essential to know what is lot size to build a balanced trading system.
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In forex, you can only open positions in certain volumes of trading units called lots. A trader cannot buy, for example, 1, euros exactly; they can buy 1 lot, 2 lots, or 0. According to the lot size definition, lot is a term used to define the contract size for a trading asset. It is the transaction size, the volume of the trading asset currency, barrels of oil, and so on , which a trader could buy or sell.
Lot is a contract size consisting of a fixed number of barrels, written in the contract specification.
The size of the contract for each broker can be different. One broker offers a lot of 10 barrels; another broker has a lot size of barrels. In both cases, the transaction is made in the volume of 1 lot. In the first case, the trade means 10 barrels; in the second case — barrels. The standard lot in Forex is , units of base currency. It means you will need , US dollars to buy , euros.
The base currency is the currency that is bought or sold for another currency. It always comes first in the quote. For instance:. The value of 1 standard lot of , units of the base currency is relevant for currencies. Other assets have a different lot size meaning. For example, for stocks, this is the number of stocks. The number of stocks in a lot depends on what stock is meant. Oil is measured in barrels, gold - in troy ounces. You can see the lot value, the number of conventional units of an asset in one contract, in the specification.
Most traders set minimum and maximum lot volume for different types of accounts. The top limit is often at lots; the bottom boundary is 0. There is a second option - to use cent accounts if the broker offers cent accounts. This screenshot displays an order being opened in the trading terminal. The account specification determines the step size. For example, the minimum step size on the Classic account is 0. The trader can manually enter the position volume accurate to the hundredth of a lot, for example, 0.
Important: Despite the standard terms, some brokers can use them differently. For example, one of the brokers has one lot equal to 10, base currency units. Perhaps this is intended to reduce the minimum amount of deposit without leverage. In any case, before you start to trade, carefully read the offer, account details, and contracts specification. When you open a 1-lot trade on a mini lot forex account, you buy or sell 10, units of the base currency instead of , as with a standard lot. The mini-lot is convenient as it requires less money to enter a trade, and so you need a smaller deposit.
One standard lot is , of base currency. If you want to enter a trade of one lot, you should spend , USD to buy , euros. If you are an individual trader, you are unlikely to have such capital at your free disposal. The minimum lot size forex under trading conditions is 0. This means you need 1, A trade of 0. A nano lot is 0.
Nano-lot accounts are called cent accounts. One lot here corresponds to a trade for units of the base currency. The smallest possible transaction with a volume of 0. Regular accounts do not allow to make transactions for such small volumes. However, cent accounts have a drawback.
Forex Lot Sizes Basics
Not only the transaction volume, i. So, professional traders, who want to recoup the time spent and make real profit, do not use cent accounts. A standard lot size is the maximum possible contract size provided by the broker's trading conditions. Do not confuse the maximum lot with the standard one:. You can find the information about the lot type used on a trading account in the MT4 contract specialization.
How to Choose a Lot Size in Forex?
In the Market Watch tab, right-click on the asset currency pair and select the Specification tab. It is clear from the specification that the contract size is ,, so the lot is standard. The specification also reads that you can enter a trade of a minimum volume of 0. In MT4, the trade volume can be selected in the window of the position opening:. The volume is not limited to 8 lots, as in the screenshot - you can enter any number up to 10, in 0. For example, To compare, I will open in the LiteForex terminal two demo accounts with a deposit of 2, USD each, with a 1: leverage.
I will open positions with a volume of 1 and 0. There will not be enough money to open a second order with the same amount of money. Of the USD, only I can use the remaining cash balance of If you reduce the lot size, you can open positions, but the financial result also decreases. For example, in this case, the floating loss is less, it is If you are sure in your trading decision to buy or sell, you can open a trade with a higher volume to increase the profit.
Aggressive strategies with a high risk level suggest entering trades with the maximum possible lot to increase the deposit. Conservative strategies suggest minimization of loss rather than chasing after the high profit, so they imply entering trades with a small volume. For whatever asset you enter a trade, it will in any case be made in the account currency.
In most cases, it is the USD. Therefore, it is crucial for traders to understand how much money they will actually have reserved in USD when opening a position, for example, for a cross rate.
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The easiest way to use the trader calculator or forex lot calculator to find out the lot size in Forex:. Remember, the leverage size does not affect the risk if there is a clearly defined target for the position volume. With the same lot size, the change in leverage affects only the amount of the collateral. You should also note whether a direct or an indirect quote when calculating the pip value.
Next, I will explain examples and formulas for calculating a lot size in USD for different types of assets. Depending on what a trading unit is lot, mini lot, or micro lot , and also depending on what is meant by it, the price of a pip is determined. The pip value is the profit or loss that a trader receives in the currency of the deposit when the price passes 1 pip point in one direction or another. The pip value is also very easy to recalculate using the trader calculator mentioned above.
If you enter a trade of 0. Differently put, the gain of one pip in a trade of 0. But we are going to stick to the risk management rules.