In forex trading, lot refer to number of currency unit’s trader buy or sell. In foreign exchange market, it refer to the least offered trade size that you can place when trading in currency pairs. Usually forex broker offer different types of lot sizes to their traders, which include, standard lot, mini lot, micro lot and nano lot. The lot size that trader use directly influence the ratio of profit and loss during trade. There are several tools like risk management calculator that help you to determine desired lot size according to account type.
Standard lot – 1 standard lot size refer to 100,000 units of currency, its means you buy 100,000 units of base currency. Let have a look at some examples that how standard lot affect pip value.
USD/CHF at an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip
USD/JPY at an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
The formula to calculate profit and loss ratio is slightly different when dollar is not quoted first.
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.
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
Mini Lot – it refer to 10,000 units of currency. This lot is strongly recommended to novice forex traders. It involves low level of risk due to small lot size. For trade in EUR/USD currency pair, worth of one pip is equal to $1. It seems small but is less risky. Sometime forex market move more than 100 pips even in an hour, so any move against your trade can result in loss as well.
Micro Lot – This lot size refer to 1000 units of currency. It is only 1% of standard lot size, (100.000 x 0.01 = 1.000 units). The worth of one pip for EUR/USD is $0.10 with micro lot. Micro lots are considered goods for novice traders.
Nano Lot – it refer to 100 or even 10 units of currency. It is smallest available lot size offered by some brokers such as XM and FXTM. It offer safest way to trade for beginners.
Successful traders chose lot size wisely according to their account type. Lot size had direct impact on ratio of profit and loss. An extremely large lot size to small account can put trader in lot of trouble. It is better to calculate you’re your risk ratio according to lot size and currency pair.