No matter how much you might dream about large returns on small trades, in reality, some of the biggest winners collect moderate returns trading at a large size.
Yet, trading large sizes is not for the faint of heart. It requires experience and sound risk management before jumping at the deep end of the market.
Read on to learn more about how to calculate volume on the forex markets and avoid common mistakes while doing so.
What Are Lots in Forex?
Just like you might buy your fuel by gallons, when you are trading you are using lots for measuring the transaction amount.
By default, 1 standard lot equals 100,000 units of currency. Additionally, other sizes commonly referred to are a mini lot (10,000 units), a micro lot (1,000 units) or nano lot (100 units).
However, when planning a trade, the main question is not the size itself but the position size in relation to value. While other asset classes (like stocks or commodities) can move several percentage points in a single day, the forex market is less volatile. Thus, its moves are measured by percentage-in-points or pips.
Because forex pairs trade as different ratios, although a lot size is always fixed, its value per pip is not. To find that value, you can do calculations like in the following example.
If the U.S. dollar is the 1st quoted currency:
- USD / JPY trading at 109.500: (0.01 /109.500) x 100,000 = $9.13 per pip
- USD / CHF trading at 0.9071: (0.0001 /0.9071) x 100,000 = $11.02 per pip
If USD is quoted the 2nd, then we need to multiply the ratio with the price again:
- GBP / USD trading at 1.3905: (0.0001 / 1.3905) x 100,000 = 7.19 x 1.3905 = $10 per pip
- EUR / USD trading at 1.1838: (0.0001 / 1.1838) x 100,000 = 8.44 x 1.1838 = $10 per pip
For the sake of simplicity, these pip values per single lot are denominated in U.S. dollars. If your account is in another currency, then these numbers would be different.
How Does a Forex Lot Size Impact Your Trading?
In the examples explained above, you could see the calculations for pip value per 1 round lot.
Although the size ultimately decides your potential profits, it is value per pip that is the main driving factor behind determining what size to use.
Any serious forex strategy, regardless of the approach, needs to have sound risk management. Trading without a stop-loss is like playing with an active bomb — you might be fine 99 times out of 100, but it is that 1 time that blows your account. Thus, you have to use a stop loss, and because its concept is measured in distance, it will be measured in pips.
Because the size of your account is measured in currency, choosing either a percentage of your account as risk or a fixed amount will require a rough value per pip calculation.
Finally, this is how you get the lot size you will use for your trade.
Consider an example below:
AUD / USD, August 4, 2021 Source: TradingView
Let’s say you decided to sell AUD/USD. You have observed that the U.S. dollar is rallying aggressively and the market 0.74100 as support. After the price broke and closed below, you decided to enter a sell position at 0.74070.
With the price action analysis, you decided that the stop-loss needs to be at least 0.74200 because that is the nearest meaningful resistance above the market. If you want to have a maximum risk of $50 per trade, what is the lot size you should use for this trade?
Your account is in USD, so as a quick trick, you can divide 50 by 13 to get the answer in mini lots. That will be 3.84 mini lots or 0.38 standard lots.
Furthermore, if you set your take profit at 0.73600 (the previous low), your maximum profit will be $180, giving you an excellent reward-to-risk ratio of 3.6:1.
How Do You Make Money on Forex Trading?
Here are the 4 most valuable tips for making money on forex trading:
Find Your Style
While there are different ways to trade, the odds are some will suit your personality more than others. If you thrive in a high adrenaline environment, you will likely love trading in a small time frame. If you’re more of a strategist, you will probably prefer larger time frames, looking at the big picture.
Beginner traders should first consider their risk tolerance, trading strategy, and account size when selecting trading lots and base currency pairs like EUR/USD.
Use a Stop-Loss
Trading without a stop-loss is simply asking for trouble. Things can go wrong and one accident can destroy your account. Always have a plan on where to put the stop-loss before you enter the trade. A rule of thumb is to use at least 10% of the average true range (ATR) if you’re unsure.
Have Realistic Expectations
The forex market is dynamic, but it is not a get-rich-quick scheme. Your profit expectations have to be realistic relative to the time frame you are trading on.
As a forex trader, you must have basic knowledge of the currency pair that you choose to trade, which includes the base currency, the quote currency, and the exchange rate between them.
Price has to move for you to make money. Naturally, you should prefer the currencies that move a lot, preferably over 65 pips per day. The easy way to filter this is to keep track of the ATR indicator.
Forex trading is a vast topic that requires in-depth research. For more information, you should visit Benzinga’s guide on how to make money on forex.
Benefits of Large and Small Forex Lots
A major benefit of forex is that it requires a small amount of capital to start. You can trade live markets with as little as a few hundred US dollars. The minimum will depend on the broker of your choice. It is ideal for those who want to slowly scale in, increasing the account as you gain knowledge and experience.
On the other hand, your ultimate goal should be to trade larger lot sizes to bring larger profits. One of the greatest strengths of the forex market is its liquidity. Regardless of your trade size, the forex market can absorb incredible money without moving the price.
Pro Tip: A position size calculator can help in determining the appropriate position size to take.
Benzinga’s Best Forex Brokers
Speculating on the currency market is the easiest through forex brokers — regulated financial intermediaries that execute foreign exchange trades on your behalf. You can check the list of Benzinga's recommended forex brokers in the table below.
- securely through Forex.com's websiteBest For:Forex Trading in and Outside the U.S.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
- securely through IG Markets's websiteBest For:Forex Execution
For USA residents: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. You could sustain a loss of some or all of your initial investment and should not invest money that you cannot afford to lose. Be advised that CFDs are not available in the U.S. from this provider.
Outside of the USA: CFDs are complex instruments. 70% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.
- securely through eToro Forex's websiteBest For:Demo Accounts
CFD trading is not available to U.S. users. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Forex Lot Size Matters
Deciding on an adequate lot size is another in the line of important decisions when planning a forex trade. Yet, it is one of the most important ones as it is directly linked to risk management.
Dealing with lot sizes can be confusing, especially if you manage more than one account in different base currencies. In that case, you should compose a cheat sheet table with values per pip to help you plan the trade.
Finally, trading at a large size should not be rushed. It should have the same treatment as weightlifting. If you increase the weight too fast, you will likely suffer an injury. Thus, increasing the trading size should have the same approach, one small step at a time.
Frequently Asked Questions
What is a 10 lot size in forex?
Since 1 lot equals 100,000 units of the underlying currency size, 10 lots would equal 1,000,000 units.
By trading USD pairs at that size, 1 pip (percentage in point) would equal roughly $1,000 for an account nominated in U.S. dollars.
How many dollars is a 0.01 lot size?
Also known as a micro lot, 0.01 lot equals 1,000 units of currency. Therefore, for any U.S. dollar pair, like USD/CHF, 1 pip move at 0.01 lot would equal a price change of $0.1.
One micro-lot is often the smallest position a currency trader can take and it is a great way to gain live market experience.
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