Choosing the Best Lot Size for Forex Trading

Choosing the Best Lot Size for Forex Trading

Undoubtedly, the forex market can yield insane growth, and for new traders, forex trading is the best platform to start.

However, as much as trading forex looks promising, without the right understanding, chances of becoming successful are minimal.

The first question that most novice traders ask is the correct lot size to start with, in forex trading.

Forex trading

A trader’s account must be kept safe from being blown whenever a losing streak of trades happens, and choosing the right lot size is crucial.

What’s Lot Size, and does it Matter?

A lot is merely the smallest trade size available that a trader can place when trading the currency pairs on the forex market. The lot size will directly impact as well as indicate the amount of risk a trader is taking.

The lot size matters, and it has a direct impact on the extent markets move will affect your account.

For instance, a 100-pip movement happening on a small trade won’t be felt as much as a similar move on considerable trade size.

Therefore, getting the best lot with a tool such as a risk management calculator with a stated output helps determine the best lot size based on the trader’s trading account assets.

There’re several lot sizes in forex trading, and the most important ones include; micro lots, mini lots, standard lots, and the Nano lots.

Forex Micro Lot

The micro forex lot is the smallest tradeable unit made available by most forex brokers. In a micro lot, a trader mostly trades 1000 units of the total funding currency invested.

If the account is funded in USD, then the micro lot would be $1,000 worth the currency willing to trade.

When trading a dollar-based currency, then a trader will deal with pips that are equal to around 10 cents.

For risk-averse individuals, new trading, or something between, then micro lots are the best options – ideal for casuals of traders.

Trading with Mini Lots

Before the micro lots, mini lots were present. A mini lot is merely 10,000 units of a trader’s account funding currency.

If a trader funds the account with USD and trades a dollar-based pair, then every pip traded will be worth around $1. For novice traders, mini lots require well-capitalization.

As much as the $1 per pip looks a small amount, in the forex market, the market may move like 100 pips in a day or even in an hour; hence, one can benefit. However, if the market moves against a trader, it means that a loss of up to $100 will be experienced.

Therefore, it’s up to the trader to carefully decide the ultimate risk tolerance. Basically, trading a mini account will require a minimum of $2,000 for comfort.

Standard Lots

Forex trading

Unlike the mini lots, standard lots are more significant in size and have 100,000 units. Therefore, it means that a trader has to show up with at least $100,000 to trade in dollars.

In the standard lots, a trader’s pips are worth $10 and could add up quickly. However, for folks afraid of losing, even when with the money comfortably, standard-sized lots are not the one for them.

The most significant aspect is to keep the lot size within a reasonable range to the account size to help preserve the trading capital to stay in the game for an extended period.

Forex Nano Lot

In the current forex market, the Nano lot is the smallest lot any broker can offer, but not all of them contribute to trade in Nano lots.

The value of a Nano lot is 100 units of the trader’s account currency. A trader with a dollar-based account, the average cost of the Nano lot would be 1% per pip.

With this type of account, a trader is eligible to start with as little as $25. Moreover, trading in a Nano lot is best when a trader is testing some new strategies in a live market.

Conclusion

If you’re about to test the forex market waters, then this is the time to start thinking deeply about your lot size.

A lot size helps maximize the earnings while restricting the drawdown to a manageable value. For novice traders, you might consider starting with micro-lots.

Author : Michael Fasogbon

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Michael Fasogbon is a professional Forex trader and cryptocurrency technical analyst with over five years of trading experience. Years back, he became passionate about blockchain technology and cryptocurrency through his sister and has since been following the market wave.