Let us start by asking ourselves what a Lot is.
It is a measurement that is used to represent a currency. A Lot size might also mean the amount of risk one takes. The more oversized lot implies a bigger size.
Different forex lot size types:
To accommodate more investors, the brokers now divide the more oversized lot into multiple smaller lots. The increased competition is one of the reasons for it. They do this to include the retail forex traders.
The sizes of Forex Lots and pips are further characterized as,
- Nano Lots – 100 units.
An investor with a 10 cents account balance will buy a USDJPY and sets a 15% stop loss. If the pair falls and hits the stop loss in the course of the trade, then the trader loses around 1.5 cents, i.e., 15pips. This might look small separately, but for the 10 cents he invested, this is a considerable loss.
- Micro Lot- 1000 units.
The base currency is 1000 units. This is 100 times smaller than 100,000, which is the size of the standard lot.
Micro (bigger than Nano) lot allows the investor to make small increments to create avenues for the fine-tuning in the strategy used.
- Mini Lot- 10,000 units.
It is one-tenth of 100,000, which is the size of the Standard lot. The base currency for one pip is 1.00$. This mini lot is commonly used among traders because of the flexibility it offers.
- Standard lot- 100,000 units.
With 100,000 unit’s equivalent to the base currency, the profits which are acquired here are massive. The average pip size is around 10$. This means that there is a profit of 100$ when the trade goes in your favor. This also means, if things go south, then you have the same amount of loss.
The movements in the case of currencies are called pips. The currency is quoted in 3 decimals. Therefore, even the slightest bit of movement is termed as a pip.
A pip is defined as one-hundredth of one percent, i.e., 0.0001, so a pip in the standard lot is 10$.
How to choose the right lot size:
It depends on the following parameters.
- The tools which you are using
The amount of risk you take directly reflects on the balance.
- Based on the analysis of current pairs
The calculator which you use for this purpose computes the data provided and gives the correct amount of lots which are to be used in the trade.