What is Lot Size in Forex Trading?




what is lot sizeWelcome guys, to today’s lesson. In today’s lesson we will be discussing about “what are lot size”. This lot is not by chance related to land or plot of land or even to a prize of money. This lot size is associated with FOREX and FOREX ONLY.

This topic and other topics that will come after, might be a bit difficult to comprehend for newbies but I will advise you to still continue reading this lesson and others, keep noting down things you do not understand because you will soon understand them when you are finally through with this educational seies and will definitely need them on your journey to forex-land.




 

What is Lot?

Let me give an example to illustrate the significant of lot size in forex trading .When you want to buy patrol from a filling station or as the Americans would call it, gasoline or gas from a gas station. They are measured and sold in liters or gallon (4.7 liter makes a gallon) this same logic applies to measurement, temperature, pressure etc. they all have a unique unit to use in classification.

The same happens in the forex market .The forex market is traded in lots. What a lot simply means is the quantity of currency one is buying or selling (remember in the forex market we buy and sell currencies simultaneously)

The standard size for a lot (1 lot) is 100,000 unit of the base currency – this means when you trade EURUSD by going into a buy position with a 1 lot size, you are buying 100,000 unit of the EURO, which is 100, 000 EURO and do not forget that euro is the base currency in EURUSD and USD is the base currency in USDJPY.

There are also mini, micro and nano lot size. The mini lot size is 10,000 unit of the base currency; the micro is the 1,000, while the nano lot size is just 100 unit of the base currency.

NOTE that only few brokers offer the nano lot size to their trading clients.

When trading with a Meta Trader 4 or 5 you will see a space to input lot size, each lot size are denoted by different figures such as, the standard lot size is denoted by the figure 1.00, a mini lot size is denoted by 0.10 and a mini lot by 0.01 lot size and a nano by 0.001.




As you already know, currencies are measured in pips, which is the smallest increment in a currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Let me give examples so that you can understand how this lot size can influence your trading results especially your profit and loss.

Our first example will be trading the pair USDJPY with a standard lot size with a market quote of 118.751

{0.010(pip) /118.751(market quote} X 100,000 (unit) =$8.42 per pip

I know the above calculation might be looking funny but allow me to crack the nut to bits.

The calculation above is trying to show traders the profit they can make when trading with a standard lot size.

If the market should move a pip (0.00010) in the trader’s favour with a market quote of 118.751 with a lot size of 1.00 which is equivalent to a 100,000 unit of the base currency then the trader will make $8.42 which can also be approximated to $10.




So imagine the market moving in a whopping 10 pip in your favour that is approximately $100 profit.

Let me give you the next example using a mini lot size (0.10) which is just 10,000 unit of the base currency.

{0.010(pip)/118.751(market quote)} X 10,000(unit) =$0.84.

In this second example above we can see that a pip increment in the movement of the price of USDJPY using a lot size of 0.10 will only produce a profit of $0.84

The next example we will use a lot size of 0.01 which is the micro lot.

{0.010(pip)/118.751(market quote)} X 1,000 (unit) = $0.084.

I won’t give an example using the nano lot size.




what is lot size

We can see from the three examples that I have given so far that the more lot size the more profit one makes. Remember I used USDJPY which has a 3 digit that is 000.123 as seen in the market quote above, now will use a pair that is  using the 5 digit and that pair will be EURUSD.

Also note that in a case where the USD is not quoted first, the calculation is totally different

Let me give a better example to water your thirsty minds.

EURUSD with a standard lot size (1.00) and a market quote of 1.27564

{0.00010(pip)/1.27564 (market quote)} X 100,000 (unit) = EUR 7.83 X 1.27564 (market quote) = $9.97 per pip can be approximated to $10 per pip

Let me explain, 0.00010 is in pips because currencies that DO NOT involve Japanese Yen (JPY) are always in 5 digits – I just want to clarify this. We just follow the normal procedure like the ones we did on USDJPY.

After that, we have gotten the value of one pip in EUR. Remember the base currency here is the EUR so we need to convert this from EUR to USD and we multiply this by the market quote.

I will give another example using the mini lot size (0.10)

{0.00010(pip)/1.27564(market quote)} X 10,000(unit) = EUR 0.78 X 1.27564 =$0.99 per pip which is approximately to $1




The last example will be using a lot size of 0.01 which is a micro lot size.

{0.00010(pip)/1.27564(market quote) X 1,000 (unit) =EUR 0.12 X 1.27564 =$ 0.15

EUR/USD at an exchange rate of 1.19230

(.00010 / 1.19230) X EUR 100,000 = EUR 8.38 x 1.19230 = $9.991474 rounded up will be $10 per pip

We can see that using a high lot size increases your profits along with your losses. That is why it is recommended for everyone trading forex to use a reasonable lot size depending on the trading equity (available money for trading) and the implementing of this, is what we call MONEY MANAGEMENT.

Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it; they’ll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.




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