What is a Forex trading lot?
The main question that traders ask themselves at the very beginning of their trading activity is how to successfully trade currency in Forex and how to find the best automated trading strategies? Professionals with extensive experience already know how to navigate the nuances of automated trading, they know what factors affect price changes and under what market dynamics they should open transactions to buy or sell currency. For a beginner, this information has not yet been sufficiently researched, so they have to understand the intricacies of Forex trading by personal example.
Our today’s analytical review will be devoted to the topic of a trading lot and how to choose the right size for it. After reading this material, you will be able to better understand the specifics of automated Forex trading and preventively avoid possible mistakes when making foreign exchange transactions. Knowledge ofintramarket processes will make it easier for you to choose an action, for example, if asset prices rise, you are more likely to open a buy order, and if the current trend decreases, then you should use a sell order.
How much currency to buy and afterwards how to regulate the transaction volume? For accomplishing our goal, we are intending to consider the definition of a Forex trading lot. Lot is a universal unit by which the volume of foreign exchange trading is measured. The lot is used to set the size of the order, that is, the trader can easily understand what the entire amount of the traded currency is relative to the lot volume. As a rule, a trading lot in Forex is usually calculated in the monetary units of a particular state, and this figure is equal to 100 thousand units. In the most popular USD / EUR currency pair, the main currency is the US dollar, so 1 lot in such a transaction is $ 100,000.
It will be useful for an average trader to know that whole or fractional numbers, which are a component of a unit of a particular deal, show the total volume of the contract. It should be remembered about such a significant indicator as the price point, because this parameter affects the size of your profit in automated Forex trading. If the price changes up or down, the amount of money on the trader’s deposit will also change. Thus, it is necessary to be aware of the direct dependence of the lot size on the asset price fluctuations.
Varieties of trading lots in Forex
Each investor sets different goals for themselves, therefore, traders should be able to choose between lots of different volumes. There are three main types of Forex trading lots, which we will discuss in detail below. The presence of such a classification allows traders to carry out automated trading in a format convenient for them, and the division of lots into the three types, including standard, mini and micro ones is an effective tool for money management. In addition, a trader can give preference to one or another trading lot, depending on the chosen Forex trading strategy.
Standart trading lot
So, the classic version of a trading lot is a standard lot. Such a lot can be called multifunctional, since it is most in demand among traders and is rightfully considered universal. By default, one unit of a standard lot is equivalent to 100,000 units of any currency. As an example, let us give a situation when an investor wants to open a deal on the KRW / USD currency pair. In doing so, they buy KRW 100,000 for US dollars. For automated Forex trading to be profitable, you should always compare the currency rate and the lot size.
Mini trading lot
The second popular type of trading lot is the mini lot. Here the trader operates with a smaller volume of traded funds, the price of such a lot is much less and is equal to 10,000 units. To conduct a successful trade in Forex, in this case, the trader needs to set a certain rate on the order, and this rate must be 0.1, that is, this indicator is proportional to the lot price. The profit from trading with mini lots may be less, however, the risks under such conditions are also reduced. If a trader still does not feel confident when trading larger amounts, you can pay attention to mini lots.
Micro trading lot
There is another type of Forex trading lot, which not all traders have heard of. This is a less commonly used measurement unit, besides, few brokerage companies support trading in such a lot. We are talking about a micro lot, it is displayed by the trading terminal as 0.01 and allows you to buy currency for only 1000 units. Some traders use micro lots to backtest automated trading strategies, since even losing trades in micro lots can serve as a useful base for identifying vulnerabilities in selected algorithms.
Perhaps, having found out about the three main types of trading lots in Forex, you will think that this is the whole classification of lots in principle. However, this is not entirely true, because in addition to the micro lot, there is also a nano lot, which, as its name implies, is the smallest in the entire typology given. What are the advantages of nano lots, do they have any practical benefits? Experts in automated Forex trading claim that the nano lot is interesting as a tool for working out short-term tactical decisions, so nano lots most often refer to cent accounts with small fractional indicators.
How to efficiently calculate the volume of a Forex trading lot?
Automated Forex trading is convenient for every trader, and machine calculation of the size of the upcoming trade is extremely important in the foreign exchange market, especially during periods of high volatility. Why is it necessary to calculate the volume of a trading lot in advance? This is an essential attribute of the correct trading activity of a trader, since understanding what the optimal lot size is will help prevent the forced closing of deals within the stop-out and with the smallest pullbacks. Many traders want to learn the correct sequence of steps for determining the lot size.
First of all, the user follows a certain value of the exit from the transaction by the command stop loss. The data for entering the desired trade and risk indicators from the calculation of one position allow you to get the stop loss level in points. Among other criteria by which a standard lot is calculated, it is also worth considering the cost of one point (pips), the total amount of funds invested in a transaction. Thus, even a novice trader will be able to make a key decision about the advisability of a transaction in principle, if they know how to calculate the volume of a trading lot in Forex. Let’s take a closer look at these parameters.
A point, or, in other words, a pip is equated to the minimum change in the currency quote. Let’s say, in the price range from 1.3624 to 1.3627, you can clearly see that the rate of this currency has changed by 3 points. Therefore, traders who are just starting their way in terms of automated trading in Forex, in order to conclude profitable transactions, need to have the following information: profit or loss is interconnected with the price of a point and the amount of the contract. Therefore, in order to calculate the size of a Forex trading lot, we should take into account a number of key parameters.
The number of such parameters will include the invested amount of foreign exchange funds, current quotes, stop length, maximum risk tolerance for a transaction and, of course, the leverage provided by the brokerage company. For example, if you take the EUR / USD currency pair to calculate a trading lot, where the capital investment is $ 5,000, the euro / dollar rate is 1.21, the stop indicators will be 100 points, and the risk will not exceed 2% and the leverage will be 1 to 100 , then we get the following formula for calculating the volume of a trading lot in Forex.
To determine the amount of capital, the trader in this example should multiply the size of the bet by the leverage, and when dividing the capital by the current exchange rate, the volume of the maximum trading lot will be obtained. This means that $ 5000 x 100 = $ 500,000 (this is the amount of capital), and $ 500,000 / 121,000 = 4.13 (we calculated the maximum lot). The trader needs to remember that the lot is a fixed amount and, as a rule, it is recommended not to exceed the threshold of 10%, that is, 4.13 must be divided by 10%, therefore, it will be 0.413. Thus, the range of the lot size spread ranges from the maximum value of 4.13 to the minimum (fixed) value of 0.413.
Expert advice for novice traders in Forex
Summarizing the above methods for calculating a trading lot in Forex, let us summarize today’s review and share some of the most important recommendations for novice traders. Despite the obvious mathematical component of this topic, we would like to note also an essential psychological aspect, which is associated with automated Forex trading. A person by nature is at risk of falling under the influence of gambling and committing rash, reckless acts.
Even if you are confident in the success of the upcoming transaction, you should not overestimate its volume. It is quite possible to reduce the likelihood of losses if you adhere to several simple algorithms of behavior. Firstly, if you are calculating the size of a Forex trading lot, avoid rounding the resulting indicator up. Secondly, backtesting an automated trading strategy in Forex should be based on data from existing practice, this is the so-called historical data. Thus, it will be easier to determine the average value of the stop loss order.
With the already known stoploss value, only the level of risks and the volume of the deposit will vary, but this parameter remains constant. For the correct calculation of the stop loss value, the trader needs to take into account the spread of the asset and base his mathematical actions on these indicators. Generally speaking, understanding the term “trading lot in Forex” and the ability to correctly interpret it will help you to effectively optimize your trading and make it more profitable, especially when using an expert advisor, which will bring trading processes to the most comfortable and convenient level for a beginner trader.