Abstract：Determining the right forex trading lot size is pivotal to enjoying a long run in the forex market. Go through this guide to know how to do it.
Gaining from forex investments depends on various factors such as deciding the right lot size. The lot size helps manage both potential profits and risks in equal measure. The forex trading lot size represents the number of units of the base currency a trader can buy or sell in one transaction. Determining the right forex trading lot size is pivotal to enjoying a long run in the forex market.
Defining Forex Trading Lot Size with Examples
The lot size is defined based on the market and the asset to be traded. If you consider the example of forex, there are typically four lot sizes each representing different units of the base currency. Check out the table below to know the different forex trading lot sizes to choose from.
Calculating the Forex Trading Lot Size
The lot size calculation holds paramount importance for traders wishing for effective risk and position size management. Calculating the forex trading lot size depends on the traders‘ account and their risk tolerance. Let’s calculate the lot size using the example below.
Example - You hold an account size of $50,000 with a risk per trade of 2%. You set a stop loss at 100 pips. The currency pair in question is INR/USD, with the pip value being $20.
Forex Trading Lot Size = (Risk Per Trade x Account Size)/ (Stop Loss x Pip Value)
= (2% of $50,000)/(100 x $20)
= 0.5 lot
Determining the Right Forex Trading Lot Size
Different financial instruments have different tick sizes, contract sizes, and volatility levels. All of these can impact your decision on creating the appropriate trading lot size. If you understand these elements, you can easily determine the right lot size.
Forex market trading is generally executed through lots of 1 lakh units. Just to accommodate several traders, forex brokers also offer mini, micro and nano lots. As a trader, you need to factor in the assets volatility. If the underlying instrument is highly volatile, it is recommended you have smaller lot sizes for efficient risk management. In case the volatility remains lower in your underlying assets, look for larger lot sizes.
Conclusion
The right forex trading lot size opens up the avenues for high earnings for traders. Do consider the illustrations made in the article to understand how lot size plays out. For all the latest updates on forex, visit WikiFX - the leading forex broker information app.
Frequently Asked Questions (FAQs)
What are the Different Forex Trading Lot Sizes?
Forex trading lot sizes are generally four - Standard, Mini, Micro and Nano.
Can Traders Make Adjustments to Their Lot Sizes During Trades?
Yes, they can based on the prevailing market conditions and the risk management strategies they should apply to stay on course with these.
I am new to Forex Trading. How Much Should I Risk?
You should not risk above 1-2% of your account on each trade. This will ensure effective risk management and consistent profits should the market fall in sync with your price speculation.
May I Know the Right Forex Trading Lot Size for Me
It depends purely on your account size, the volatility of the currency pair you have invested in, and your risk tolerance.
