What is a Lot in Forex Trading, What Kind of Lots to Trade?
Each open position on the market forex is measured in lots. Lot is one of the main concepts, and any trader should know about it. What is a lot, what is its price and what is the size of one lot? Let's try to understand this concept in details.
What is a forex lot?
In forex, a lot is a unit of value that measures the size of a transaction (Forex Trading). In other words, the lot is the size of the financial transaction. Based on the number of lots that a trader trades, the size of the investment will be important. A large number of lots equals a larger amount of money invested and vice versa. There are the following types of lots in forex:
Let us dwell on each of them in more detail:
- The standard lot is 100,000 units of the base currency. In the case of four-digit quotes, a price change of 1 pip means a change of 100 units. The size of one unit varies depending on the account being traded ($1 on a dollar account and 1 cent on a cent account). So, on a cent account, 1 pip would be 100 cents, while on a dollar account it would be 100 dollars.
- The mini lot is 10 times smaller than the standard lot. That is, on a classic dollar account with four-digit quotes and using the mini lot, one pip would be equal to 10 units, which corresponds to $10.
- A microlot is an even finer split of a lot. It is already 100 times smaller than the standard one. On a classic dollar account with four-digit quotes, one pip will be equal to $1. When trading on a cent account it will be equal to 1 cent.
Beginners, as well as those traders who are not willing to risk large sums of money tend to use micro lots. If a trader has just started his way to Forex, then it is recommended not to use the standard type of lot (Forex Trading Training). If every pip has a price of 10.04$ and you incur a loss of 100 pips, that loss will cost the trader $900. That's why it is wise to gain experience on micro accounts, where the trading risks associated with losses will be minimized (Forex without Investment and Risk). There are brokers who allow traders to use cent accounts and nanolots, where the amount on the deposit is equal to 100 units. Nanolot is the lowest risk option, which can be used at the initial stage of work on the market. Nanolot is also suitable when a trader has decided to test a new TS.
How is the lot calculated?
The size of the deposit and the speculative system determine the volume of trades made by market participants. Naturally, they are different for everyone. Even one and the same speculator in one session may have different volumes. In order to calculate the lot volume you need to know two indicators: the percentage of risk and the number of points before the stop order.
For example, on the deposit trader has $ 1000, the risk is no more than 1% of the size of the deposit for one order, and the level of stop is equal to 50 pips. Given these values, a single losing position can deprive the trader of $10 (1000*1%). If 50 points equals $10, then 1 point will be equal to $0.2. For a 0.01 lot, the price of a pip equals 10 cents. With all that in mind, a working lot would be equal to a value of 0.02, or 2 micro lots. In principle, there is nothing difficult. A careful study of the basics of forex trading is necessary for every trader (forex trading strategies). You should not hope for millions when your "baggage" has no basic knowledge of the foreign exchange market and market trading. First of all theory, and then practice.
Pros and cons of the microlot
A microlot equals a volume that is a hundred times smaller than the standard one. By the way, the division of one minilot into small parts is also used. For example, a 0.1 mini lot is 100 units of the base currency, and thanks to the leverage it is possible to trade starting from a few dollars. This is the reason why trading with a mini lot is called cent trading. It is performed on cent accounts where the deposit is counted in cents instead of whole units. For example, if a trader has $10 on his account, the terminal will display 100 units.
This allows you to get real trading skills, while minimizing the risk of losing a large amount. However, it is quite difficult to get a normal income, trading such volumes, in addition, it is important to take into account that the size of 1 pip is also reduced a hundredfold. If the transaction volume is 1 micro lot, then the average value of 1 pip is $0.10. To open an order using the tool Euro / dollar and leverage of 1:100 on the trader's account should be approximately 1.35$. Here it is very important to consider that this is the smallest amount for the order, and in real trading, it is recommended to have not less than $10 on the deposit.
How much can I earn on small lots?
To answer this question, you need to know how much income a particular trader is expected to earn. If one trading day it is possible to earn 30 points of profit or $3, then the monthly income will be more than $70. This is a pretty good result, taking into account the small amount on the deposit. However, it is quite difficult to achieve such results, so do not get your hopes up. It is recommended to use a cent account first of all to train your skills.
And if you decide to use the standard lot, you will have the opportunity to earn through the cashback service. Many Forex brokersFor example AMarkets (go online), return part of the spread in the form of a bonus. If a trader trades a lot and in a big way, this increment can be very significant. As you have already understood lot is an integral part of trading, it is a kind of a tool that regulates both profit and loss. In hands of inexperienced trader it would bring only disappointment and losses, but he, who can master his trader passions, would appreciate it.