A lot in Forex trading basically refers to the size of a trade or the amount that a trader trades at any given time.
Because the lot size directly influences the risk you're taking, it's the first thing you need to understand fully, before identifying your entry or exit points. Even the best trading strategy will fail you if you don’t have a clear idea of the lot size you should be using.
You will understand more as we go along.
4 Types of Lots Defined
A standard lot is equivalent to 100,000 units of the Base currency.
A mini lot is 10% of the standard lot or 10,000 units of the Base currency.
A micro lot is 1% of the standard lot of 1,000 units of the Base currency.
A nano lot is 0.1% of the standard lot of 1,000 units of the Base currency.
It is often the case now that the default is the standard lot. You can trade as small as a micro lot on Fullerton Markets’ MT4 platform.
Let's say you want to trade 1 lot or 100,000 units of AUD/USD, the size of the trade is equivalent to AUD 100,000.
Understanding Pips and Value per Pip
A pip or percentage in point is the change in value between two currencies. For yen pairs, 1 pip is 0.01 while for most of the other currencies, 1 pip is 0.0001.
If the value of EUR/USD opens at 1.1385, for example, and closes at 1.1395, then the result is 10 pips difference. Another example is USD/JPY opens at 107.400, and closes at 107.420, the result is 2 pips difference.
In terms of calculating the value per pip, the formula is as follows:
Pip value in Counter/Quote currency = (Pip in decimal X 100,000)
USD/JPY, Value per pip per lot = (0.01x100,000) = JPY1,000.
AUD/CAD, Value per pip per lot = (0.0001x100,000) = CAD10.
The good news is that you don’t need to do this manually. You can simply use any of the pip value calculators available online.
Why should you care about lots, pip, and pip value? Because you need all three to calculate profit and loss.
Profit/Loss = Number of Pips x Value per Pip x Lot size
For example, when you buy EUR/USD at 1.32140 and close it at 1.32250:
Number of Pips = 11
Value per Pip = USD$10
Lot size = 1 (standard lot)
Profit = 11 x USD$10 x 1 = USD$110
Your profit or loss will be USD$110.
Another example, when you sell USD/JPY at 107.55 and close it at 107.95:
Number of Pips = 40
Value per Pip (JPY) = JPY$1,000
Lot size = 1 (standard lot)
Profit = 40 x JPY1,000 x 1 = JPY40,000
Your Loss will be JPY40,000 and has to be converted to the base currency (USD) which is: JPY40,000/107.95=USD370.54
Now, do you see why it's important to understand lot size in Forex?
Use a Position Size Calculator
Rather than doing manual calculations, you can take a shortcut and use one of the many position size calculators online. This tool will tell you what position size to trade based on your risk level, your choice of currency pair, and stop-loss or pips. Here's one from BabyPips.
Ready to grow your wealth in the world's largest financial market? No better place to start than right here with us! Begin trading with Fullerton Markets today by opening an account:
Fullerton Markets International Limited (FMIL) is committed to providing the highest level of service to its customers. In some instances, and due to regulatory or legal requirements, FMIL is unable to provide services or accept customers from certain countries. Currently FMIL does not accept customer from Iran, Cuba, Sudan, Syria and North Korea. FMIL subscribes to the rules of FX regulated jurisdictions such as Hong Kong, Singapore, Japan and United Kingdom accordingly, does not accept solicited clients from these countries. This is not an exhaustive list of countries from which FMIL does not accept solicited clients and is updated as required. Customers should familiarise themselves with the FX rules applicable in their country's before deciding to use FMIL's services.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor.