Before any trader jumps into the market and starts trading, it is imperative that they understand the concept of lot sizes. Throughout this article we will explain what a lot is, different lot sizes and how to calculate your various position sizes. What Exactly is a Lot? In forex trading, lot size is a measure of how many units of the base currency in a forex pair that a trader has in an open position. There are four different types of lots – standard, mini, micro and nano – which vary in quantity and give market participants the ability to control their exposure to a higher degree.
Here’s a look at the lot sizes, from biggest to smallest lot size.
The largest lot size is a standard lot, which is equal to 100,000 units of the base currency in a FX trade. For example, if a trader is trading the GBP/USD exchange rate and the current spot price is 1.2000, one standard lot of the base currency (GBP) would be 120,000. This essentially means you need 120,000 US Dollars to buy 100,000 British Pounds.
A mini lot is a tenth of a standard lot and therefore is equal to 10,000 units of the base currency in an FX trade. You tend to see professional and wholesale traders utilize standard lots while more experienced retail traders will tend towards mini lots. Using the GBP/USD exchange rate once again at the spot price of 1.2000, one mini lot of the base currency (GBP) would be 12,000. This means you would need 12,000 US Dollar to buy 10,000 British Pounds.
A micro lot is one tenth of a mini lot meaning it is worth 1,000 units of the base currency of the exchange rate being traded. This lot size is a favourite among retail traders and those new to trading as it lowers your potential downside by using a smaller position. Again, using the GBP/USD example, one micro lot would be 1,200 of the base currency (GBP) if the spot price of the exchange rate is 1.2000. In other words, you would need 1,200 US Dollars to buy 1,000 British Pounds.
The fourth and smallest lot size available is the nano lot which is one tenth of a mini lot. Nano lots are 100 units of the base currency of the exchange rate being traded. This is a great size to use especially for novice traders and those who are more risk averse. Using the GBP/USD example, one nano lot would be 120 units of the base currency (GBP) if the spot price is 1.2000. Meaning you would need 120 US Dollars to buy 100 British Pounds.
Calculating Lot Size
Calculating your lot size is fairly straightforward and generally not something you have to scratch your head over, as your trading platform will take care of that for you. However, the simple way to do so is by following the examples above. Multiply the current spot rate by the following amounts for each lot size:
- Standard Lot = Spot Price x 100,000
- Micro Lot = Spot Price x 10,000
- Mini Lot = Spot Price x 1,000
- Nano Lot = Spot Price x 100
Lot Size Impact on Potential Profit & Loss
The different lot sizes allow traders to determine the amount of risk they want to take on a particular trade. Standard lots tend to be more high risk as they are bigger positions while nano lots impact your profit and loss significantly less. A one-pip move is worth the following amount when using the GBP/USD exchange rate as an example:
- Standard Lot = $10 per pip
- Micro Lot = $1 per pip
- Mini Lot = $0.10 per pip
- Nano Lot = $0.01 per pip