1 Lot Size Forex
What you will learn:
- Lot definition
- Different Lot sizes explained
- USD and EUR practical illustrations
- The correlation between margin and leverage
- Understanding the intrigues in Margin Call calculation
What is a Lot Size in Forex?
These different sizes include: Lot Size in Forex. Standard Lot Size. A Standard Lot size is the most commonly used among the four different types of Lot sizes. This Lot size holds 100,000 units of the base currency, and is assigned the value of 1.0. This value equals to 100,000 Dollars in trade if you are using Dollars as your base currency. If you don’t find the needed pair in the list, you can try to FIND IT HERE. These different sizes include: Lot Size in Forex. Standard Lot Size. A Standard Lot size is the most commonly used among the four different types of Lot sizes. This Lot size holds 100,000 units of the base currency, and is assigned the value of 1. The standard lot in Forex is 100,000 units of base currency. For example, if the EURUSD rate is 1.1845, you will need 118,450 base currency units to open the position of 1 lot. It means you will need 118,450 US dollars to buy 100,000 euros. The base currency is the currency that is bought or sold for another currency. 1 lot in forex is 100,000 units of currency. The value of the pip for 1 lot is roughly $10 based on the EUR/USD. Traders who trade in lot sizes are usually experienced and comfortable with the risk associated with it.
In Forex trading, a standard Lot refers to a standard size of a specific financial instrument. It is one of the prerequisites to get familiar with for Forex starters.
Standard Lots
This is the standard size of one Lot which is 100,000 units. Units referred to the base currency being traded. When someone trades EUR/USD, the base currency is the EUR and therefore, 1 Lot or 100,000 units worth 100,000 EURs.
Mini Lots
Now, let’s use smaller sizes. Traders use Mini Lots when they wish to trade smaller sizes. For example, a trader may wish to trade only 10,000 units. So when a trader places a trade of 0.10 Lots or 10,000 base units on GBP/USD, this means that he trades 10,000 British Pounds.
Micro Lots
There are many beginners or small investors who wish to use the smallest possible Lots sizes. In contrary to the Mini Lots that refer to 10,000 units, traders are welcome to trade 1,000 units or 0.01. For example, when someone trades USD/CHF with a Micro Lot the trader basically trades 1,000 USDs.
Pip Value
Now that we understand what Lots are, let’s take one step further. We need to calculate the Pip Value so we can estimate our profits or losses from our trading.
The simplest way to calculate the Pip Value is to first use the Standard Lots. You will then have to adjust your calculations so you can find the Pip Value on Mini Lots, Micro Lots or any other Lot size you wish to trade.
USD Base Currency
Our calculations in this sector are when your Base currency is the USD. We will provide three different examples.
USD quote currency of the currency pair. You’re trading 1 standard Lot (100,000 base units) that the quote currency is the USD such as EUR/USD. The Pip Value is calculated as below:
100,000*0.0001 (4th decimal)=$10
USD base currency of the currency pair. You’re trading 1 standard Lot (100,000 base units) and the base currency is the USD such as USD/JPY. The Pip Value is calculated as below:
The USD/JPY is traded at 99.735 means that $1=99.73 JPY 100,000*0.01 (the 2nd decimal) /99.735≈$10.03. We approximated because the exchange rate changes, so does the value of each pip.
Finding the Pip Value in a currency pair that the USD is not traded. You’re trading 1 standard Lot (100,000 base units) on GBP/JPY.
The GBP/JPY is traded at 153.320. Because the value changes in the quote currency times the exchange rate ratio as
The Pip Value => 100,000*0.01JPY*1GBP/153.320JPY = 6.5 GBP
Because the base currency of the account is the USD then we need to take into account the GBP/USD rate which let’s assume that is currently at 1.53560.
6.5 GBP/(1 GBP/1.53560 USD)= $9.98
EUR Base Currency
Now let’s make our examples when the Base Currency of our account is the EUR
EUR base currency of the currency pair. You’re trading 1 standard Lot (100,000 base units) on EUR/USD. The Pip Value is calculated as below
The EUR/USD is traded at 1.30610 means that 1 EUR=$1.30 USD so
100,000*0.0001 (4th decimal)/1.30610 ≈7.66 EUR
Finding the Pip Value in a currency pair that the EUR is not traded. You’re trading 1 standard Lot (100,000 base units) on GBP/JPY. From our example before, we know that the value is 6.5 GBP. Now, we need to take into account the EUR/GBP rate in order to calculate the Pip Value. Let’s assume that the rate is currently at 0.85000. So:
6.5GBP/(1GBP*0.85 EUR)= (6.5 GBP/1 GBP)/0.85 EUR≈7.65 EUR
Leverage – How it works
You are probably wondering how can I trade with Lot sizes of 100,000 base units or even 1,000 base units. Well, the answer is very simple. This is available to you from the leverage you have in your account. So let’s assume that your account’s leverage is set at 100:1. This means that for every $1 used, you’re actually trading $100 in the Forex market. In order for you to trade a position of $100,000 then the required margin to open such a position will be $1,000. As for any losses or gains these will be deducted or added to the remaining balance in your account.
If your account’s leverage is set at 200:1 this means that for every $1 you use you’re actually trading $200. So for a trade of $100,000 you will require a margin to be at $500.
Margin Call – What you should know
Now looking at the examples above regarding the leverage you’re probably thinking that is the best to work with the highest possible leverage. However, you need to take into consideration your Margin requirements as well as the risks associated with higher leverages.
Let’s just say that you have deposited first $5,000 to your trading account that the leverage is set at 100:1. Your nominated currency is the USD. The first time you will login to your MT4 trading account you will notice that the Balance and the Equity is $5,000 and this is due to the fact that you did not place any trades yet.
Now, you have decided to open a position on the USD/CHF of the 1 standard Lot which means that you will require use a margin of $1,000. The floating P/L is at -9.55. The account will show the following
| Balance | Equity | Margin | Free Margin | Margin Level |
|---|---|---|---|---|
| 5,000 | 4,990.45 (5,000-9.55) | 1,000 | 3,990.45 (4,990.45-1000) | 499.05% (4990.45/1000)*100 |
If your Forex Broker Margin Call level is set at 100% this means that when the Margin Level reaches this percentage it will notify you to add more funds. As you can understand from the example above, the P/L, and your Margin will affect your Margin Level. Now, if your Broker sets the Stop Out Level at 50% this means that your position will be closed by the Broker when the Margin Level reaches that level.
Let’s use another example when your leverage is set at 200:1. We will use the same example above to understand how the leverage will affect your Margin Level. Your account will show the following
| Balance | Equity | Margin | Free Margin | Margin Level |
|---|---|---|---|---|
| 5,000 | 4,990.45 | 500 | 4,490.45 | 998.10% |
By looking at the numbers above, you will prefer to use a higher leverage for your account. However, let’s assume that the market goes against you and you have bought 9 Lots of USD/CHF but the pair falls. When you open your position you will have the following numbers:
| Balance | Equity | Margin | Free Margin | Margin Level |
|---|---|---|---|---|
| 5,000 | 4,990.45 | 4,500 (900,000/200) | 490.45 | 110.90% |
As we explained above, the broker will give you a Margin Call when you have 100% margin level. This means that you will receive a Margin Call when the USD/CHF falls 5 pips only. On the other hand, if you had a Leverage set at 100:1 the would not allow you to enter into such a position from the first place and you would have saved your equity.
That's the end of the Beginner Course,lets move on to another learning section
Forex is commonly traded in specific amounts called lots, orbasically the number of currency units you will buy or sell.
A “lot” is a unit measuring a transaction amount.
When you place orders on your trading platform, orders are placed in sizes quoted in lots.
It’s like an egg carton (or egg box in British English). When you buy eggs, you usually buy a carton (or box). One carton includes 12 eggs.
Forex Trading Micro Lot
The standard size for a lot is 100,000 units of currency, and now, there are also mini,micro, and nano lot sizes that are 10,000, 1,000, and 100 units.
| Lot | Number of Units |
|---|---|
| Standard | 100,000 |
| Mini | 10,000 |
| Micro | 1,000 |
| Nano | 100 |
Some brokers show quantity in “lots”, while other brokers show the actual currency units.
As you may already know, the change in a currency value relative to another is measured in “pips,” which is a very, very small percentage of a unit of currency’s value.To take advantage of this minute change in value, you need to trade large amounts of a particular currency in order to see any significant profit or loss.
Let’s assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.
- USD/JPY at an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
- USD/CHF at an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip
In cases where the U.S. dollar is not quoted first, the formula is slightly different.
- EUR/USD at an exchange rate of 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
- GBP/USD at an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Here are examples of pip values for EUR/USD and USD/JPY, depending on lot size.
| Pair | Close Price | Pip value per: | ||||
|---|---|---|---|---|---|---|
| Unit | Standard lot | Mini lot | Micro lot | Nano lot | ||
| EUR/USD | Any | $0.0001 | $10 | $1 | $0.1 | $0.01 |
| USD/JPY | 1 USD = 80 JPY | $0.000125 | $12.5 | $1.25 | $0.125 | $0.0125 |
Your broker may have a different convention for calculating pip values relative to lot size but whatever way they do it, they’ll be able to tell you what the pip value is for the currency you are trading at that particular time.
In other words, they do all the math calculations for you!
As the market moves, so will the pip value depending on what currency you are currently trading.
What the heck is leverage?
You are probably wondering how a small investor like yourself can trade such large amounts of money.
Think of your broker as a bank who basically fronts you $100,000 to buy currencies.
All the bank asks from you is that you give it $1,000 as a good faith deposit, which it will hold for you but not necessarily keep.
1 Lot Size In Forex In Usd
Sounds too good to be true? This is how forex trading using leverage works.
The amount of leverage you use will depend on your broker and what you feel comfortable with.
Typically the broker will require a deposit, also known as “margin“.
Once you have deposited your money, you will then be able to trade. The broker will also specify how much margin is required per position (lot) traded.
For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account.No problem as your broker would set aside $1,000 as a deposit and let you “borrow” the rest.
Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.
The minimum security (margin) for each lot will vary from broker to broker.
In the example above, the broker required a 1% margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
Forex 1 Lot Equals
Let’s say you want to buy 1 standard lot (100,000) of USD/JPY. If your account is allowed 100:1 leverage, you will have to put up $1,000 as margin.
The $1,000 is NOT a fee, it’s a deposit.
You get it back when you close your trade.
The reason the broker requires the deposit is that while the trade is open, there’s the risk that you could lose money on the position!
Assuming that this USD/JPY trade is the only position you have open in your account, you would have to maintain your account’s equity (absolute value of your trading account) of at least $1,000 at all times in order to be allowed to keep the trade open.
If USD/JPY plummets and your trading losses cause your account equity to fall below $1,000, the broker’s system would automatically close out your trade to prevent further losses.
This is a safety mechanism to prevent your account balance from going negative.
Understanding how margin trading works is so important that we have dedicated a whole section to it later in the School.
It is a must-read if you don’t want to blow up your account!
Moving on for now…
How the heck do I calculate profit and loss?
So now that you know how to calculate pip value and leverage, let’s look at how you calculate your profit or loss.
Let’s buy U.S. dollars and sell Swiss francs.
1 Lot Size Forex Trading
- The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ASK” price of 1.4530, the rate at which traders are prepared to sell.
- So you buy 1 standard lot (100,000 units) at 1.4530.
- A few hours later, the price moves to 1.4550 and you decide to close your trade.
- The new quote for USD/CHF is 1.4550 / 1.4555. Since you initially bought to open the trade, to close the trade, you now must sell in order to close the trade so you must take the “BID” price of 1.4550. The price that traders are prepared to buy at.
- The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
- Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40
Bid/Ask Spread
Remember, when you enter or exit a trade, you are subject to the spread in the bid/ask quote.
When you buy a currency, you will use the offer or ASK price.
When you sell, you will use the BID price.
Next up, we’ll give you a roundup of the freshest forex lingos you’ve learned!