When you start diving into forex trade, there are a lot of specific terms essential for this industry. It might be overwhelming to learn everything from scratch, but in reality, it is quite simple if you know where to start. One of the crucial things in forex trading is a lot. Here, you will learn what it means and what is a lot size in forex.
Understanding Forex Trading Lots
A forex lot is a special unit that helps with measuring currency transactions on the forex market. A single lot consists of one hundred thousand units of any currency. For example, one lot of dollars is 100,000 dollars. This is a large amount, which is why there are a few different lot sizes for forex apart from the standard one. They include:
- Mini lot – ten thousand units of currency
- Micro lot – one thousand units of currency
- Nano lot – one hundred units of currency
These terms are necessary for facilitating the trading process, simplifying communications, and avoiding errors as much as possible. However, different brokers might display their amounts either in the size of lots or just in currency units as they are.
Another important forex trade term is called “pip.” Pips indicate small changes in currency value while trading. Pips have different worth based on the currency pairs in question. For example, one of the most common pairs is USD/EUR, and the pip for this pair is 0,0001. To put it simple, imagine that this pair is trading at 1,1435, but then, the price changes to 1,1434. This means that prices changed one pip.
Determining a Forex Lot
Now that you know what is lot size forex, it is necessary to learn how to calculate one lot. Before opening a position, each trader has to choose the optimal forex lot size. This volume is important to face possible fluctuations without losses. Here are some of the criteria to be taken into account when opening a position:
- The maximum acceptable risk per one position
- The level of stop-loss calculated in pips
- The deposit volume
- The price for a single pip within a regular lot
If you are a forex beginner, try not to overestimate transaction volumes. Make sure not to round up your results when determining a lot size as well. Try to choose a less elaborated trading strategy and test it on historical data. This will help with determining the optimal stop loss and other values.