Once you begin trading in the forex market, you, of course, learn about trading lots. A lot defines as the smallest trade size available that every trader can place when they trade currency pairs in the forex market. Most brokers refer to lots by the multiplication of 1,000 or a micro lot. Choosing the right lot size in forex trading will significantly and directly affect the risks you are taking.
The Importance of Forex Lot Size
The easiest way to find the right lot size for you is by using a tool like a risk management calculator. This tool will find the desired lot size based on your current assets on your trading account.
The direct effect from your lot size is on how much effect will you get from each market move. For instance, if you trade a small trade, you will not feel any effect from a 100-pip move. But, the effect will be bigger if you trade a larger trade.
Trading with Micro Lots
A micro lot is a lot of 1,000 units from the funding currency of your account. In other words, if your account gets funded in U.S dollars, then, a micro lot is $1,000 worth of your chosen base currency. If you trade pairs that are dollar-based, 1 pip is equal to 10 cents.
For beginners, micro lots are good since they help to minimize the possible risk.
Moving to Mini Lots
Before we have micro-lots, we had mini lots. Mini lots are bigger than micro-lots. It is 10,000 units of your currency account funding currency.
With dollar funded account, trading a dollar-based pair, one pip in the trade is worth around $.100. If you are interested in using mini lots, while you are a beginner, then make sure you are sufficiently capitalized.
You may think that $1.00 per pip is small, yet the forex market can be extremely volatile. The market can move 100 pips in a day or even in an hour.
Thus, once the market moves against you, you will get $100 loss in a day or in a single hour.
The Standard Lot
The standard lot is a 100,000 unit lot. Meanwhile, the average pip size for this lot is $10 per pip. That means you will get $100 loss for every 10 pips down. Also, this standard lot is only available for institutional-sized accounts. Thus, you need to at least have $25,000 to trade with standard lots.
But, remember, most forex traders you meet are going to trade mini lots or micro-lots. It may not seem glamorous, yet it preserves their trading capital for the long term.