What Is Lots In Forex
What is a trading lot?
Such matter every bit a "lot" plays important role in activeness of whatsoever trader. In this commodity, nosotros'll discuss the term "trading lot" on Forex and depict the ways to calculate it.
A lot is a volume of an functioning on the Fore market, which is defined by global standards. one lot e'er equals to 100,000 units of a base currency.
For example, in instance of USD/CAD, 1 lot is 100,000 USD, because the base currency of this pair is the American Dollar. If 1 takes such instrument as EUR/USD, and so ane lot equals to 100,000 EUR or, translated at the current exchange charge per unit, 137,000 USD (EUR/USD rate is ane.3700, hence 1 lot equals to 100 000 * 1.3700).
To open a position of 1 lot worth 100,000 USD, one requires quite a lot of money on their account or the leverage, that's why fiscal operations with such amounts of money are by and large performed by large funds and dissimilar financial institutions. As for retail speculators with relatively pocket-size deposits, brokerage companies provides them with an opportunity to merchandise fractional lots.
For standard USD accounts:
- Standard lot (full-sized) – 100,000 unit of a pair base currency; the volume is defined equally 1.
- Mini lot – 10,000 units, divers as 0.ane.
- Micro lot – i,000 units, defined as 0.01.
For cent accounts:
- The same, but everything is in cents.
Since al operations on the interbank Forex market are performed with full-sized lots, brokerage companies that work with retail clients automatically accumulate fractional lots into a puddle and place them on the market in total. This arroyo allows any trader to perform operations with currencies regardless of the amount of money they have.
How to calculate a lot on Forex?
When opening a position, a trader needs to summate the optimal volume, i.e. the quantity in lots, which will allow the trader's eolith to remain stable in case of any fluctuations against the open position. The order shouldn't be closed by Stop Out even in example of the slightest price pullback.
Starting time of all, to calculate the volume of a position to be opened, i must decide on two major components:
- The amount of maximum permissible risk for 1 position to be opened.
- Stop Loss level in pips from the entry point.
In add-on to that, the following factors are used for calculations:
- The eolith amount.
- The cost of 1 pip of the toll when using standard lots.
There are several methods of calculating the optimal lot size on the Forex market, and we'll review 3 of them. In our examples, nosotros're going to use the following parameters:
- Eolith is 2,000 USD.
- Currency pair is GBP/USD (the cost of 1 pip in case of 1 lot club is 10 USD).
- Maximum permissible risk for one transaction is 3%.
- Cease Loss length is 100 pips (the distance between the entry betoken and Terminate Loss level).
- The leverage value is 1:100.
All calculations are made for a trading business relationship with the USD as its base currency.
Standard lot method
This method implies that the fixed lot size is specified but one time and all further trading operations are performed with this particular value. When using this methods, one should have into account that:
- In instance the lot size significantly increases, risks and possible losses increase besides.
- In instance the lot size significantly decreases, efficiency of using your funds decreases as well.
In such a case, the recommended size book for our instance shouldn't exceed x% of the highest possible. The maximum lot for this currency pair is 1.2, which ways that the fixed lot shouldn't be more than 0.12.
Calculations are as follows:
2,000 USD * 100 (the leverage value) = 200,000 USD (coin for performing trading operations in USD).
200,000 USD / 164,190 USD (100,000 GBP at the current USD charge per unit of 1.6419) = 1.21 (the maximum possible volume in lots).
1.21 * x% = 0.12.
Lets continue.
Calculations based on the stock-still exposure
The lot size is calculated based on the maximum exposure for one transaction. When opening an social club, one specifies the position volume, in case of which possible losses will not exceed the ready value. For this purpose, 1 calculates the exposure, which is 60 USD in our example. Then one should specify the number of pips to Stop Loss, 100, which means that the maximum price of 100 pips shouldn't exceed threescore USD. The lot size should be calculated in such a mode that the total corporeality of incurred losses doesn't exceed the exposure. This method of calculation will allow to maximize profit with aggressive loss limits.
Adding:
2,000 USD * iii% = threescore USD (the maximum exposure).
sixty USD / 100 (pips) = 0.6 USD (the maximum price of one pip).
0.half-dozen USD / 10 USD (the cost of 1 pip of the full-sized lot) = 0.06 (the maximum lot size with at given loss limits).
Also, in this case 1 should have into account any changes in the deposit amount, hence to adapt calculations based on the current business relationship residue. If the deposit increased up to ii,500 USD, and then the maximum exposure will be 75 USD (ii,500 USD * 3%), then the lot size will be equal to 0.07. In case the deposit drops downwards to 1,800 USD, the maximum exposure will be 54 USD and the lot size – 0.05.
Calculations based on the margin level and the deposit usage
This method is based on the idea that the maximum deposit usage tin can't exist more than 15%. According to the parameters of our example, we tin open new positions equally long as the margin is less than 300 USD.
In this instance, the volume of the position opened in GBP/USD can't exceed thirty, 000 USD and the maximum lot size will be 0.18.
Calculations:
2,000 USD * 15% (the deposit usage) = 300 USD (the maximum margin in USD).
300 USD * 100 (the leverage value) = 30,000 USD (the position volume considering the leverage).
30,000 USD / xvi, 190 USD (100,000 GBP at the current USD rate of ane.6419) = 0.18 ((the maximum possible volume in lots).
These example show quite uncomplicated means to calculate the lot size on the Forex market when trading only i musical instrument. In reality, traders hardly ever merchandise just one instrument and open only 1 order.
That's why calculations should be performed with allowance for the number of open positions and the total permissible exposure for the unabridged deposit.
And in the 3rd case, one should distribute the margin between the number of open up positions.
To smooth things down for traders, also equally avoid getting lost in details, you tin can e'er detect different scripts for calculating the lot size in the Net, which are run directly in the trading platform, or utilize an online calculators offered by brokers and other field-oriented companies.
Recommendations for beginners
It is critical for beginners non to enlarge the volume of transactions, even if you are 100% sure of the issue.
Beneath nosotros volition offering some useful tips that will help reduce the level of possible losses:
- During the calculation of the lot size, do not round the result up. Rounding should occur simply to the smaller side. Example: when you lot got the value 0.728, with the right rounding, your outcome will be 0.72.
- Test the selected trading strategy on historical information, which helps to determine the optimal average Stop Loss lodge value. This simplifies the calculation, since you no longer take to substitute new values. Just the size of the eolith and the level of risk will alter, the balance of the information is known.
- When calculating Stop Loss levels, it is imperative to consider the size of the spread. If you place a stop society at xxx, and the spread value is 2, then Stop Loss should be set at 32.
Source: https://Blog.RoboForex.com/blog/2019/09/17/how-to-calculate-a-trading-lot-in-forex-market/
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