Forex lot sizes can be confusing when you're first starting out. But not to fear, this post will show you how they work.
Lot sizing is a little different in Forex, compared to other markets, but once you figure it out, it's actually quite simple.
I'll also show you why lot sizing is very important in trading and how to choose a broker based on the lot sizes they provide.
The Hierarchy of Success in Trading
Before I get started on lot sizes, it's important to understand why lot sizes are important.
They are important because they are major element of risk management.
Success in trading is determined by prioritizing the following elements of trading…in this order of most to least important.
- Trading Psychology
- Risk Management
- Trading Strategy
However, most beginning traders have a priority list that looks like this:
- Trading System
- Trading System
- Trading System
- Trading System
- Trading Psychology/Risk Management
…and that's why most aspiring traders fail.
Risk management is much more important to your success than your trading strategy, so pay attention to your risk per trade and your lot sizes.
This video will explain how Forex lots work.
What is a Pip?
You'll need to understand the concept of pips in Forex to calculate risk, so I'll cover that briefly before we move on. If you understand this already, feel free to skip down to the next section.
There are basically 2 types of price quotes in commonly traded Forex pairs.
- Pairs with Japanese Yen in the pair
- Pairs without Japanese Yen in the pair
Yen pairs are quoted in 2 or 3 decimal places. The 2nd decimal is a full pip and the 3rd decimal is a pipette, or fraction of a pip. It's like a fraction of a cent in stock share prices.
Pairs that don't have Yen in them are quoted in 4 or 5 decimals. The 4th decimal is the full pip and the 5th decimal is the pipette.
Here are 2 examples of how you would calculate pips for each of the types of pairs.
Currency Units by Lot Size
Minimum lot sizes are easier to understand in other markets because it's usually 1.
Here are a few examples:
- 1 Share of stock
- 1 Futures contract
- 1 Options contract
But in Forex, there are some preset “packages” of lot size units.
These are the lot sizes that are available in Forex:
- Standard Lot: 100,000 currency units (lot size of 1 in MetaTrader)
- Mini Lot: 10,000 currency units (lot size of 0.1 in MetaTrader)
- Micro Lot: 1,000 currency units (lot size of 0.01 in MetaTrader)
- Nano Lot: 1 currency unit (lot size of 1 in TradingView/Oanda, not available in MetaTrader)
This is great in theory, but what does it mean in live trading? Well, it might be easier to think of lot size in terms of profit/loss per pip.
Keep in mind that the value per pip will vary by broker and currency pair. But I'll use the EURUSD as an example because the pip value is generally pretty similar across all brokers, and it's usually a nice round number.
- Standard Lot: $10/pip
- Mini Lot: $1/pip
- Micro Lot: $0.1/pip
- Nano Lot: $0.0001/pip
How to Figure Out Which Lot Size to Use
To find out the correct lot size to use on each, you can use a lot size calculator like this one. Most brokers have one available.
If you can't find a calculator on your broker's website, contact their support and they can point you in the right direction.
In order to calculate the correct lot size, enter the information about your trade. In the margin field, enter the maximum risk that you want to take on this trade.
Remember that Oanda uses nano lots, so the number of units will be a little different than if you used a calculator that was built for MetaTrader or another trading platform. Use the table in the previous section to convert nano lots to mini, micro or standard lots.
For example, let's say that you have a $10,000 account and you want to risk 1% on a trade, which is a $100 of risk per trade.
Your calculator will look like this:
Since Oanda uses nano lots, the maximum trade size is 4,244 nano lots or 4 micro lots, if you round down. If you choose to round up, then you would take the trade with 5 micro lots.
Herein lies the issue with brokers that do not use nano lots.
When a broker only offers mini or micro lots, then you have to round up or round down. This means that you will be risking more or less than is optimal for your account.
Over time, this can have a detrimental effect on your account because you aren't risking a consistent amount per trade. So some winning trades won't make up for the losing trades.
How to Choose a Broker Based on Lot Size
Choosing a broker based on the lot size that they offer is pretty easy. Start by calculating how much money you'll be risking per trade.
For example, if you have a $1,000 account and you want to risk only 1% per trade, then you'll be risking $10 per trade. Now go back to the pip value list in the previous section and how many pips that would be for the EURUSD, for each of the lot sizes.
This example would be as follows:
- Standard lot: $10 (risk per trade) / $10 (pip value) = 1 pip of risk
- Mini lot: $10 (risk per trade) / $1 (pip value) = 10 pips of risk
- Micro lot: $10 (risk per trade) / $0.1 (pip value) = 100 pips of risk
- Nano lot: $10 (risk per trade) / $$0.0001 (pip value) = 100,000 pips of risk
Then figure out the maximum number of pips you'll be risking on your trades. If you're day trading and only going to be risking 100 pips or less, then you could potentially get away with a micro lot account.
But if you will be risking more than 100 pips, then it's better to go with a nano lot account.
However, if you have a bigger account, like $100,000, then a micro lot account is probably a good size to trade.
You'll have to make your decisions on which lot size is right for you, but knowing the right lot size before your first trade will get you started on the right foot.
First-In First-Out and Hedging
There are a couple of other terms that you may hear, in relation to lot sizes and entering trades in Forex. They can be a little confusing when you're first starting out, so I want to make you aware of them.
First-In First-Out (FIFO)
In non-US brokers, you can enter and exit positions as you please. This is the way that it should be.
However, if you have a US based account, you'll have to exit your trades in the order that you entered them.
So let's say that you enter 2 Japanese Yen trades as follows:
- Trade 1: Long 2 mini lots
- Trade 2: Long 1 mini lot
If you have to follow the FIFO rules, then you would have to exit trade 1 before you exit trade 2. Some US brokers will also blend your trades, so you'll only see an average of the 2 trades, not 2 separate trades.
I'm not a fan of FIFO, but there are ways around it. You can read this post on how to do it.
Hedging
Hedging is when your broker allows you to hold both long and short positions in the same trading account.
Again, US based accounts cannot do this, but traders in the rest of the work can. There is a way around it, but some traders may not need it.
Final Thoughts on Forex Lot Sizes
Lot sizes are an important component of risk management. Understanding how your broker and trading style affect the lot you use is one of the first things that you should learn in trading.
If you use the correct amount of risk per trade, you'll be able to stick around longer and figure out the trading game. Use too much risk and you'll blow out your account and be forced onto the sidelines.
Take a few minutes to figure out your ideal lot size right now.
