Welcome to the definitive guide on one of the most important, yet often overlooked aspects of forex trading – lot sizes. If you want to become a successful forex trader, you need a solid understanding of lots, so you can correctly size your positions and manage your trading risk.
What is a Lot in Forex Trading?
A lot represents a standard trade size within your forex trading account. It is the smallest unit that can be traded on the exchange.
The specific amount of currency units that makes up a lot can vary between different brokers and financial instruments. However, one standard lot usually represents 100,000 units of the base currency.
So if you’re trading on EUR/USD, one lot would represent 100,000 euros. This is considered the standard lot size for most currency pairings.
When you open a position in the forex market, you need to decide how many lots you want to trade. Your position size is then determined by the number of lots x the lot amount in base currency.
For example, if you buy two standard lots (2 x 100,000) of EUR/USD, you are buying 200,000 euros against the US dollar.
Being able to properly size your trades using lot sizes is critical for money management, controlling position size and limiting risk. Now let’s look at how lot sizes impact your trading.
How Lot Sizes Work and Impact Your Profits
It’s easy to see how lot sizes directly impact your trading. Essentially, the more lots you trade, the larger the position size, and the greater potential profit or loss.
Let’s break this down with an example:
- You open a buy position on GBP/USD at 1.3000 with 2 standard lots (2 x 100,000 pounds)
- A few days later the price increases by 100 pips to 1.3100
- You close your 2 lot position for a profit
- Each pip movement in a standard lot equates to $10 profit
- So with 2 lots, every pip movement = $20 profit
- 100 pips x $20 per pip = $2,000 total profit
As you can see, trading more lots equates to larger pip value and more profit potential. However, larger positions also mean higher risks.
You need to strike the right balance between risk and reward based on your account size and risk tolerance. We’ll dig deeper into proper position sizing and risk management a bit later in this guide.
But first, let’s look at the different types of lot sizes available…
Types of Lot Sizes
There are several different position size options available for forex trading:
Standard Lots
As we discussed already, the standard lot is the most common trade size and typically represents 100,000 units of the account currency.
When trading USD pairs, a standard lot equates to $100,000. So 1 pip of movement equals $10 profit or loss (100,000 x 0.0001).
Most brokers allow trading standard lots, which are good for accounts over $100,000. However, many traders find these too large for effective risk management.
Mini Lots
The mini lot is one-tenth the size of a standard lot at 10,000 units. For USD accounts, one mini lot is $10,000, so a 1 pip move is worth $1 profit or loss.
Mini lots allow for smaller position sizing and are popular for accounts under $100k in size. They provide finer trade sizing between micro lots and standard lots.
Micro Lots
Micro lots are one hundredth the size of a standard lot, representing just 1,000 units. For USD traders, micro lots come to $1,000 each, making each pip $0.10 profit or loss.
Micro lots are great for small accounts, allowing more precision in position sizing. Most brokers offer micro lots, even for mini account holders below $500.
Nano Lots
The smallest tradeable lot size is called a nano lot, which represents 100 units of the account currency. So for USD accounts, each nano lot equals $100 in trade size.
At just 0.01 per pip, nano lots provide super fine position sizing. However, they are not widely available across all brokers.
Which Lot Size is Right for You?
We’ll cover how to select the ideal trade size later in this guide. But as a very general rule of thumb:
- Standard lots are for professional traders with accounts over $100k.
- Mini lots suit mid-sized accounts from $10k to $100k.
- Micro/nano lots are best for smaller accounts under $10k.
However, proper position sizing depends on many factors. You want to choose lot sizes that match your risk tolerance and account size to maximize returns while limiting risk.
Next let’s look at how brokers and lot sizes work…
Leverage and Lot Sizes
When trading forex online, brokers provide leverage up to 500:1. This allows you to open much larger positions than your account balance would normally allow.
For example, if you have a $1,000 USD account and 200:1 leverage, you can open $200,000 worth of currency pairs. This comes to 2 standard lots (2 x $100k).
However, just because you can trade oversized positions with lots of leverage doesn’t mean you should!
Remember, leverage is a double-edged sword. Large positions multiply your profits when right, but also amplify your losses when wrong.
To avoid getting overleveraged, most traders use proper position sizing with smaller mini or micro lots at moderate leverage ratios like 30:1.
Proper risk management is crucial, which brings us to our next point…
Risk Management and Appropriate Lot Sizing
One of the biggest keys to trading success is effectively managing your risk on each trade. Your position size, based on number of lots traded, directly impacts the risk on a position.
To properly size positions, you first need to calculate your maximum risk per trade, based on your account size and risk tolerance.
A common rule of thumb is to risk no more than 1-2% of your account on any single trade. If trading a $10,000 account, you would risk $100-$200 per position.
Once you know your risk amount, you can use a position size calculator to determine the proper number of lots to trade for that amount of risk.
Let’s look at an example:
- Account size: $10,000
- Maximum risk per trade: $150
- Current EURUSD rate: 1.1500
- Stop loss distance: 30 pips
- Risk per standard lot: $300 ($100,000 * .0030 pips)
- To limit risk to $150 with a 30 pip stop, you should trade 0.5 lots ($150 / $300 per lot)
By using sound position sizing based on account value and risk limits, you protect yourself from taking on excessive losses. Proper lot sizes are crucial for this.
Next let’s look at typical lot sizes used by different traders…
Typical Lot Sizes Used By Forex Traders
The specific position size you use should be based on your personal account size, risk tolerance, and broker’s available leverage and lot sizes.
However, here are some general guidelines on typical lot sizes used based on account balance:
- Nano lots (100 units) – For accounts under $500
- Micro lots (1,000 units) – For accounts $500 to $2,000
- Mini lots (10,000 units) – For accounts $2,000 to $50,000
- Standard lots (100,000 units) – For professional accounts over $50,000+
So for instance, if you are just starting out trading a $1,000 account, you would trade in micro lots to begin. This allows you to open reasonable positions sizes with minimal risk.
As your account grows to $5,000+, you can start trading mini lots to gain higher returns while maintaining safe risk management.
Bottom line – lot sizes should match your account size and risk tolerance. Stick to nano/micro lots when starting out, then scale up as your account grows.
Now let’s look at how to select the ideal lot size for your personal account situation…
How to Choose the Right Lot Size for Your Account
Here are some tips on selecting appropriate trade sizes and lot types based on your account balance:
- Use a Percent Model – Determine max risk per trade (e.g. 2%), then use a position size calculator to see how many lots fit that risk limit.
- Consider Broker Leverage – If your broker offers 400:1 leverage, doesn’t mean you should use it all. Keep leverage reasonable to avoid margin calls.
- Match Lot Type to Account – Use micro lots for under $2k, mini lots up to $50k, and standards lots over $50k.
- Factor in Volatility – For volatile pairs like GBPJPY, you may want smaller lots to limit risk exposure. For slower pairs, you can increase lot size a bit.
- Start Small – When in doubt, start with small position sizes and very small risks, then scale up as your confidence and account grows. Managing risk is crucial.
While you should crunch the numbers, proper position sizing also comes from experience. Ultimately you have to find the right balance of risk vs reward for your personality and account size.
Now let’s look at some key mistakes traders make when using lots…
Common Mistakes to Avoid with Lot Sizes
Some common mistakes beginner traders make when using lots include:
- Using way too big lot sizes and over leveraging account
- Not scaling down lots when on a losing streak
- Not adjusting lots based on account growth
- Trading random lot sizes without a risk management plan
- Not using a stop loss and having no risk parameters
- Not knowing the proper lot size that matches account balance
The way to avoid these mistakes is:
- Calculate proper lot size based on account value and risk limits
- Scale lot size appropriately as account grows
- Use disciplined risk parameters for every trade
- Use stop losses and stick to a risk management plan
Proper position sizing through strategically-sized lots is critical to trading success. This completes our complete guide to forex lot sizes!
Conclusion: Use Lots Sizes Wisely
Lot sizes are your trading weapon, but must be used wisely. When used properly, the right lot sizes allow you to execute precise positions to maximize profits while controlling your risk.
Now you have a complete understanding of standard, mini, micro, and nano lots, how they work, and how to select the right sizes for your personal account and risk tolerance.
The next step is to practice strong risk management on each trade using smart position sizing techniques. This will unlock your potential for forex trading success and big gains over the long run.
