Home Investment How To Use Forex Lot Sizes in Your Trading Strategy?

How To Use Forex Lot Sizes in Your Trading Strategy?

by Louise W. Rice

The lot size is a common term in forex trading and refers to the units of the current one in trading. In other words, it is a unit of measurement used to standardize the size of the trade. The lot size is used because trading a single unit is not viable. So, traders use lot size to trade large batches of currencies.

Understanding the concept of lot size is vital in trading forex. It represents the number of units a trader buys or sells. So a prudent trader may use the Litefinance lot size calculator to determine the position size and the order to place.

A standard lot size is 100,000 units of currency. However, you can also choose micro, Nano, or mini size, i.e., 1,000, 10000, and 100 units, respectively. In a nutshell, lot size could refer to a batch of currency you can control. Read on to learn how to use lot sizes in your trading strategy.

Balancing Opportunity and Risks

Balancing opportunity and risks is an important undertaking in trading forex. Consequently, one must use a calculator to determine an appropriate lot size before placing the trades. But before you calculate the lot size, you must state your objectives and determine your risk tolerance.

Notice that the lot size impacts how the market movement affects your account. For instance, if a currency moves 100 pips on a small lot trade, the profit or loss you make is smaller than if it moves 100 pips on a large lot size.

So selecting a larger lot size makes a trade riskier, while a very small lot size might not generate worthwhile gains. Thus, a new trader may choose to trade with micro lot size- the smallest tradable lot brokers provide. Micro lot represents 1,000 units of the account funding currency. Selecting it implies that your trades are $1000 worth of the currency you are trading. So if the money in your account is dollars, one pip is equivalent to ten cents. Thus, micro lot size is good for beginners since it helps them minimize risks as they practice trading.

On the other hand, when you choose a mini lot, it represents 10,000 units. So if you are trading a dollar-based pair, each pip will equal $1.00. Thus, trading using the mini lot requires a bit of capital.

Finally, you may choose to use a standard lot. In this case, it refers to 100,000 units. If you choose to trade in dollars, it is $100,000. So the trader’s account will increase or decrease by $10 per pip depending on the price’s direction. The lot is, therefore, suitable for experienced traders with well-funded accounts.

So if you are a beginner, your account may not be well funded; hence a micro lot size could be the most appropriate. On the other hand, experienced traders with well-capitalized accounts would need a standard lot size.

Calculating the Lot Size

Typically, you may not need to calculate the lot size since the trading platform should tell you the right size to choose depending on your capital. But some platforms will not allow you to use a standard lot size if your account has less than $1000. So once the lot size is determined, you may only need to calculate the overall size of your position. However, some platforms will allow you to choose your preferred lot size.

Accordingly, if you want to choose a big lot size, you must have more money in your account. Here is what 1 pip movement will be worth.

  • A nano lot =$0.01
  • Micro lot =$0.10
  • Mini lot=$1
  • Standard=$10

Final Thoughts

Undoubtedly, the lot size is an important tool to a forex trader. It determines how emotional and dramatic the trading experience will be. Therefore, through lot sizes, traders can visualize the risks or the gains they are likely to suffer or make on any trade.

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