Standard lot forex trading
When you buy a currency pair, you are buying the base currency, using the quote currency. On the other hand, when you sell a currency pair, you are selling the base currency to buy the quote currency. The same analogy applies to the micro lot and nano lot. From our discussion so far, it follows that one mini lot is equivalent to 0.
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In the same vein, one nano lot will be equivalent to 0. It is important you note that your trade volumes must not be in a single unit of the standard, mini, micro, or nano lot. You can actually trade 2, 3, or more standard lots, mini lots, or micro lots — as your account size trading capital allows you.
Of course, 2 standard lots means , units of the base currency, just as 3 micro lots would mean 3, units of the base currency. For any given currency pair, the lot size you trades affects the value of each pip you make or lose. As a rule, the bigger the lot size, the bigger the pip value, but why is that?
What is a lot size and how to calculate a lot in Forex
To understand how lot size affects pip value, you need to understand the concept of pip. It is the standardized unit for measuring price movements, and it is represented by the fourth decimal point 0. Therefore, the pip is considered the smallest price change in a currency pair until most brokers stated adding another decimal point to the currency quotes, making the 4-point pairs now five decimal points 1. The last point, which is called the pipette, is one-tenth of the pip and is now the smallest unit of price change in a currency pair.
The pip value can be measured in terms of the quote or the base currency in the pair. Even for currency pairs that do not contain USD, brokers often covert the value to USD for easy profit and loss calculation. Before we proceed to show how the lot size affects the pip value, you should note this: In a currency pair, the quoted price exchange rate is the value of the quote currency that exchanges for one unit of the base currency.
So, price movement represents a change in value in the quote currency. Now, to show how different lot sizes affect the pip value, we have to calculate the pip value using different lot sizes. Thus, the pip value for the various lot sizes are as follows:. Please note that the pip value in USD calculated here is the same for any currency pair where the USD is the quote currency. It is also important to note that the pip value of any lot size varies in currency pairs where the USD is the base currency.
In the world of financial trading, leverage is the amount your broker is ready to lend you so that you can trade bigger lot sizes than your account balance could carry without it. It is expressed as a ratio of the amount lent by the broker to the amount you must provide to trade that lot size, which is referred to as the margin — more on that later. If a broker offers leverage of , for example, it means that for each amount you provide, the broker will make it up to 50 times that amount.
So, you can use one unit of a currency pair to control 50 units of that pair, and by extension, you can use 2 units to control units nano lot size , 20 units to control 1, units micro lot size , units to control 10, units mini lot size , and 2, units to control , units standard lot size. By trading bigger lot sizes, leverage allows you to increase your profits, but it also magnifies your losses by the same factor. Note that amount of leverage does not have any effect on the value of the lot size itself — a standard lot remains , units, while a micro lot is still 1, units — but it can affect the number of lots you can trade with the balance on your account.
You can also look at it the other way round — the number of lots you trade with a particular account size determines the amount of leverage you are using since you must not use the maximum leverage provided by the broker.
What Is Lots Size In Forex
Hence, no matter how much leverage allowed by the broker, you can control how much you use. Margin is closely related to leverage, and, hence, its value can be affected by the lot size. Margin can be classified as required, used, or free margin. The Required Margin is the amount of money a trader needs to put down in order to open a specified lot size of a leveraged trade. It can be expressed as a percentage of the total amount the specified lot size is worth or in the actual amount of the margin requirement.
When there are many open trades, the term Used Margin refers to the aggregate of all the Required Margin from all open positions. Also known as usable margin or available margin, Free Margin is the amount available to open new trades or cushion the effects of negative price movements until the trade is stopped out or you get a margin call. Required Margin varies with both the leverage and the lot sizes. For a given leverage ratio, the Required Margin percentage is the same, but the actual value of the Required Margin varies with the different lot sizes.
Your Guide to Forex Lot Sizes: Mini, Micro, and Standard Lot - Pro Trading School
The bigger the lot size, the bigger the margin required to trade it, as you can see in the table below. And from the table above, for a specified lot size, the higher the allowable leverage, the smaller the amount that can be used to carry 1 lot size. Money management is all about how you manage your trading account. Most currencies value of pip is 0. This is usually the value most beginner traders start with. It is enough for you to risk some capital, but not enough for you to panic when the market goes against you.
In fact, we recommend that traders move on to this trading size and away from a demo account as soon as they are comfortable. Traders that use mini lots are now more adapted to the markets and are looking to grow their capital further by taking on more risk. Traders who trade in lot sizes are usually experienced and comfortable with the risk associated with it.
Now if you are trading 5 lots in forex, then you certainly have a decent trading account size to take on larger risks and larger rewards. The beauty of modern-day trading platforms is that they remember your preferences when it comes to trading, so if you want to trade 0.
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