How many lots should you trade in Forex?Julius Conley 28 / May / 22 Visitors: 375
How Forex lots are calculated:
Lot is a position volume measurement unit, which is a fixed amount of the base currency in the foreign exchange market (Forex). The volume is always displayed in lots, and the lot size directly affects the level of risk. The larger the Forex lot size, the higher the risk.
Risk Assessment (Risk Management) includes a model that calculates the optimal standard lot size in the forex markets based on the perceived level of risk, volatility (stop loss level) and leverage.
In the usual sense, a lot is a standard unit for measuring the volume of a currency position that a trader opens. In other words, this is the amount of money that a trader invests by buying a currency with the aim of selling it later at a better price.
Lot calculation is one of the main components of the recommended risk management system for those who approach trading in a balanced and structured way.
In Forex, positions can only be opened within certain volumes of trading units, called lots. A trader cannot buy, for example, exactly 1000 euros, he can buy 1 lot, 2 lots or 0.01 lots, etc.
A standard lot in Forex is 100,000 units of the base currency. For example, if the EUR/USD rate is 1.0545, then a 1-lot position will be opened for 105,450 units of the base currency, i.e. for the amount of US dollars for which you need to buy 100,000 euros.
For currency pairs, including the US dollar (EUR/USD, USD/CHF, GBP/USD…), let's take the most popular example of all, EUR/USD:
- 1 lot = 100,000 units of account currency (if your account is in EUR, 1 lot = 100,000 EUR)
- 1 mini lot (0.1 lot) = 10,000 account currency
- 1 micro lot (0.01 lot) = 1000 account currency
- 1 nanolot (0.001 lot) = 100 account currency
Please note that depending on the broker these lots will be expressed differently: number of lots, volume or number of units. Despite the classic terms, some brokers may use them differently. For example, for some brokers, 1 lot is equal to 10,000 base units of the account currency.
This is usually done to reduce the minimum deposit amount without leverage. In any case, before you start trading, carefully read the offer, account characteristics and contracts. The pip value is also determined by depending on the unit (lot, mini or micro lot).
How many lots should you trade in Forex?
Questions usually arise when it comes to choosing the amount that matches the number of lots you calculated. There are two ways to calculate the cost of a lot in Forex: using the position calculator or using the auto-trading wizard.
Optimizing the size of the position in relation to the amount of the deposit, taking into account the risk and the desired return on investment, helps to balance trading.
Calculate your Forex lots with Position Calculator
Most brokers offer calculators on their websites, the principle of which is the same: the trader specifies the currency pair, lot size and direction of the position. The calculator calculates the pip value and profit (loss) based on the current quotes.
Let's take the LiteForex calculator as an example. It's as practical as the others, but not flawless. It allows you to calculate the amount of loss or profit based on the following data: currency pair, position size, trading direction, account type and leverage.
However, the position calculator cannot calculate the risk, you will have to do it manually. Another significant drawback: you can not set a leverage of 1:1. Also, this calculator is only available in English.
If the lot size remains unchanged, changing the leverage affects only the amount of the deposit. When calculating the value of a pip, you should pay attention to the currency pair. For example, the pip price in EUR/USD is 10 USD per standard Forex lot.
Other calculators can be much more complete and easy to use, with a French interface and streamlined money management.
There are also special cases such as USD/JPY where the pip value will be less than $9. The calculation formula in this case will be: (1 pip * lot size) / market price.
Use the automated trading wizard to calculate your lots
Almost all position calculators (except the stock one) have the same problem: you cannot calculate the lot size depending on the level of risk, which is the goal of volume planning trading.
Therefore, it can be especially interesting to use the automatic trading assistant to calculate your lots and position sizes in Forex based on your level of risk.
You can customize the amount of your allocated capital, as well as the desired level of risk that suits your money management rules.
When the program finds a signal that matches the criteria you set, it will automatically tell you the position size you need to open to match your money management:
An example of a signal from EnBourse's automated Autosignal program for automatic position calculation.
This type of software allows you to set nothing other than the amount of capital and automatically calculates position size when it detects and announces a trading signal based on graphical analysis (AI) to you.
This signal automatically indicates the lot size, and is also a chart showing different levels: open, breakeven, take profit and stop loss. There is nothing for you to do, everything is automatically calculated taking into account your money management.
How to place a Forex order with the required number of lots?
Managing the volume of open positions consists of two elements: determining the optimal ratio between the volume of open transactions and the level of risk.
High volatility can quickly exhaust the deposit, the trader's task is to choose the optimal ratio of the volume of open transactions to the deposit, taking into account the risk. In trending markets, trading volume management should include the use of lot increase factors.
The risk management strategy should also provide for the maximum risk for the position. It is generally recommended to keep the risk below 5%.
Another guideline is the amount of margin reserved by the broker when using leverage. In theory, it should not be more than 10-15%, but this mark is secondary.
First of all, the higher the leverage, the lower the available margin. Lower margin forces the trader to open trades with higher volume, which increases the risk.
The trader evaluates his deposit, decides whether to use leverage or not, determines the target volume based on risk management (the level of risk tolerable for each transaction and in general), and converts it into lots.
Actually, things are a bit more complicated because the currency pairs are different and sometimes it is necessary to calculate the value of a pip in pairs other than the US dollar. Using a high performance calculator or automated software. then takes on its full value to save valuable time (and avoid errors through simplification).
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How to use position calculation to place an order:
Now we will look at the whole process: for example, from calculating the position size to opening a trade in Metatrader and Oanda.
To do this, you must first detect a signal on a currency pair, through fundamental or chart analysis (either visually or with the invaluable help of automated software).
In this example, imagine that we have detected a buying opportunity for a currency pair. Visually place the stop. Now we need to calculate our position size using a calculator or software.
We enter this data, and once all the parameters are filled in, the calculator prompts us to open, for example, a position of 0.022 lots to comply with our money management.
In Metatrader, we can note two important points:
As a general rule, you cannot trade nano lots. So you can't choose 0.022. Therefore, it is necessary to take the nearest value, in this case 0.02.
According to brokers, mini-lots are not always displayed in the drop-down list. However, you should be aware that you can still write it directly in the "volume" field.
An example of opening a Forex deal in the Metatrader program.
Before checking the ticket, do not forget to enter a stop loss. It can be added after the order is completed, but for security reasons it is important to mention it from the beginning (forgetting, unexpected movement).
Here you can trade nanolots. On the other hand, the field indicates units, not batches. So in our example 0.022 lots = 2200 units.
It is important to note that sometimes the calculation result will only match nanolots (for example, 0.008). In this case, in order to respect your money management, you will need:
- Find a broker that will let you trade nanolots
- Increase your capital to be able to open positions in at least micro lots while following money management rules.
Therefore, in the Forex market it is very important to master the lot principle in order to be able to place your orders in complete safety and in accordance with your basic risk management rules.