How to Calculate Forex Lot: Example of Forex Lot Size Calculation | FxPro
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Markets are the realm of precise numbers. And we are talking about both the physical, ordinary food market and the financial market. Everything you buy or sell at the counter has its own volume, be it a dozen eggs or a bushel of grain. Accordingly, the largest and most liquid market in the world, the foreign exchange market, is no exception.
Thus, when opening a forex transaction, the size of the position is determined by a unit of measurement known as the trading lot size. The volume of transactions with currency pairs will always be measured in lots, and the choice of its correct size will have one of the decisive values for successful trading. In this article, we will talk about how to calculate the appropriate lot size for making trades on different trading strategies.
What is the lot size in Forex?
First of all, a currency trader needs to understand the essence of what a forex lot is.
As we have already said, a lot is a unit of measurement. It is used to denote the number of currency units involved (bought or sold) in a transaction. This brings us to the fact that forex lot can be different.
The standard lot size is 100,000 currency units, but it is possible to use fractional values. For example, on the trading platforms of FxPro, the client can open trades from 0.01 lot size. The mini lot size is 10,000 units (0.1) and the micro lot size is 1,000 units (0.01). In some companies you can also find nano-lots - 100 units, which are usually used for trading on cent accounts (FxPro broker does not provide them).
Types of lot
Many factors determine how to choose a lot (i.e. trade size), as well as what lot size is best suited for your trading strategy and risk management plan.
Typically, most traders choose a lot size so that only 3-5% of the capital on their balance is used in their trade.
Starting with these thoughts is an important part of your overall risk management plan. Your trading account balance, your leverage, and your potential target profit all affect how you view the lot size for your next trade. It should be aligned with your trading strategy and can be the same from order to order, or it can vary depending on the asset, fundamental or technical analysis, trade duration, replenishment and position duration.
Standard lot (1 lot or more) is considered for traders with a large initial deposit. Most traders do not use such volume for a single position, applying fractional lot size in trading.
Let us remind you that a standard lot implies opening a transaction with the volume of 100,000 units of the base currency (for example, 100,000 euros for EURUSD). And this is only for opening a single 1-lot trade. Spending 100% of your deposit on one transaction is tantamount to going to the exchange, and for forex trading it is irrational (do not forget about the traditional 3-5% of the deposit per transaction), and the amount is significant.
Here the leverage provided by the broker comes to the rescue. It allows you to increase the size of your initial deposit tens and hundreds of times, and therefore open positions with a full lot, and even with several lots.
For example, with a starting capital of 1000$ without using leverage, it is possible to open a deal of only 0.01 lot, loading 100% of the deposit. When requesting leverage of 1:100, the deposit increases 100 times, becoming $100,000, which allows you to freely trade with 0.01 lot, using about 1% of the capital per trade. The profit in this case from the initial investment will be greater, but the risk of loss is correspondingly higher. The use of leverage also implies the presence of margin.
Mini lot (10,000 base units) or one tenth of a standard lot (0.1) is the most commonly used lot size when trading on a medium-sized deposit (about $1,000) using leverage of 1:100 or more.
A 1 pip change in the quote for a trade opened with this size will result in a profit or loss of 1 currency unit: Mini lot 10,000 * 0.0001 = 1.
The amount looks small, but it is better to use protective orders when opening such trades to avoid unexpected losses and lost profits.
Micro lot is one of the most common and popular sizes for forex trades. It is chosen by beginner traders who have just tested strategies on a demo account and are ready to carefully move to a real balance. Their deposit is usually hundreds of dollars, so when using leverage, micro lot trading will be the most comfortable and suitable for Money Management.
The amount of profit will be 0.1 monetary unit per 1 point of price change:
Micro lot 1000 * 0.0001 = 0.1.
Nano lots are really rare, and therefore we can safely say that the micro lot is the smallest transaction volume in the modern forex market. We will talk about how to calculate it further.
Calculating lots: how item cost is affected
To begin, a small digression. As you know, the minimum move in price that it can go up or down in one period of time is called a pip. However, changes in the value of a currency can also be very small, which is why there is another, smaller unit of measurement to represent these fluctuations - the pip. In fact, a pip is often the fifth decimal place in a quote. For example, if you are trading EURUSD, whose value has suddenly changed from 1.2040 to 1.2041, that 0.0001 euro increase is a one pip increase. However, if you look at the quote in more depth, meaning five decimal places, this value has changed by 10 pips.
Knowing this, how do you calculate the appropriate forex lot and potential profit? Let's take the following example: you are trading GBPUSD, choosing a trade volume of 10,000 pounds (this is a mini lot). In order to understand your potential profit from a trade of this size, you can calculate the pip value (just considering your lot size). It turns out as follows: if in our example the GBPUSD exchange rate moves one pip from the 1.0300 level, we can represent this movement as the following formula:
[(0.1) / (1.03)] x 1 = 0.00009708 (price step with a trade volume of 1 pound).
This means that on a 10,000 unit trade, one GBPUSD pip would be worth approximately £0.97. We figured this out by substituting 10,000 instead of a unit (one pound) in the formula above, i.e. our mini lot size:
10 000 x 0,00009708 = 0,97.
Thus you can use the pip value to calculate the potential profit on forex in any currency pairs, knowing the size of the lot used.
Changing the lot size: leverage
Now you know how to calculate the size of a pip, pips, as well as the potential profit at the selected lot size. Speaking of which, as we mentioned earlier, you can also trade with a full lot, even if you don't have 100,000 in your account yet. This is because the broker gives you the opportunity to use leverage of different sizes.
Leverage or trading leverage is essentially borrowed money that the company gives you for the duration of an open trade. This money increases your trading position to the amount needed to place your trade in the market. For example, 1:200 leverage increases your invested amount by 200 times. However, it is crucial to realize that the risks of losing capital as a result of trading also increase proportionately.
For example, using a leverage of 1:100, you can trade a whole standard lot (100,000 dollars) on USDJPY, having invested only 1000 in the deal. The level of leverage should also be considered when planning your forex risk management.
Ways to calculate the lot size on Forex
So, you can calculate the lot size on forex as follows:
- A standard lot is equal to 100,000 units of the base currency (the first in the pair).
- To calculate how much 0.01 lot is, all we need to do is multiply 0.01 by 100,000. The result will be 1,000.
- So, if we buy 0.01 lot when making a trade on EURUSD, it means that our position size will be 1,000 euros.
How to calculate the lot for reverse pairs and cross rates?
So far we have described how to calculate the lot size and pip value per micro lot (0.01 lot) using currency pairs where the quote currency (second in the pair) is the US dollar (XXX/USD).
If you need to calculate the pip cost per lot size for currency pairs in which the dollar is not directly involved, or pairs in which the dollar comes first, you can use the following formula:
PIP Value = (1 PIP/Exchange Rate) * Lot Size, where
- 1 PIP is the pip value for the currency pair selected for trading. In most cases it is 0.0001.
- Exchange Rate or Exchange Rate is the current price of the selected currency pair.
- Lot Size or Lot Size is the actual number of monetary units. For example: 100 000, 10 000, 1000, 100.
- PIP Value - the result of the calculation, i.e. the value of a pip per lot size.
This value is always expressed in the base currency, which you can then convert to the currency of your choice (usually US dollars). The only time you do not need to convert is if the dollar is the first currency in the pair, i.e. the base currency (USD/XXX).
When the USD is the second currency in a currency pair, you do not need to use the formula above, because you already know that:
- PIP Value for a standard lot on pairs quoted in USD is 10 dollars,
- PIP Value for a mini lot on USD-quoted pairs is 1 dollar,
- PIP Value for micro lot on pairs with a quote in USD - 0.1 dollars,
- PIP Value for nano lot on pairs with quotation in USD - 0,01 dollars.
For all other variants of pairs (cross rates, inverse) use the above formula and you will be able to calculate the pip value per lot size regardless of the currency pair you are trading.
Recommendations for beginner traders
Now you know how to calculate the cost of the price step of the selected asset at different lot sizes. It remains to answer the main question: how to choose a lot? Especially when there is an opportunity to use leverage 1:100, and 1:200 and even more.
First of all, determine what part of your current deposit you are going to risk in each transaction (for sure you are planning to open not one, but several). This will allow you to quantify your risks and greatly simplify money management. Establish a risk/reward ratio.
That is, for example, if you define for yourself a maximum allowable loss of $200, and your target profit is also $200, you will have a Risk/Gain ratio of 1:1. A 1:2 ratio, for example, assumes a potential risk of $100 with a target profit of $200. A typical risk/profit ratio is usually higher than 1:1, because with a higher target profit you can still make a profit after the same number of losses. However, a lot depends on the trading strategy, there is no standard rule here.
In any case, keep in mind that using leverage requires understanding, and trading a large number of forex lots is a two-way stick. Large profits can just as quickly turn into impressive losses. The main rule of thumb is to never risk more than you can afford to lose, and don't forget about Stop Loss and Take Profit protection orders.
So, now you know what is important to take into account when calculating the volume of open positions, as well as what the lot size is and how to use it.