If you’re looking to get into Forex trading, you’re sure to have seen the ‘lot’ mentioned. Here, CM Trading will walk you through exactly what the lot is, and why you need to understand it to trade well.
A lot is actually a very simple concept. It is a ‘bundle’ of units within your trade. In other words, it’s the size of the trade you are making. The simplest way to picture this is through the example of beer. Beer will typically be bought in a six-pack. Now, you can purchase as many of those six-packs as you want, but you can’t split the pack. That’s how lots work, only for Forex trading, the ‘six pack’ is the bundle of currency allotted to the trade.
Typically, the smallest lot you can trade is the ‘micro lot’, which represents 1000 units of currency. Nano lots of 100 do exist, but are not typical. Then there is Mini lots at 10 000 and the standard lot of 100 000. You can then trade any size you want, as long as it is a multiple of the relevant chosen lot size. This is where a lot [no pun intended] of the art of Forex trading comes in. Of course, the more lots you have, the more potential for winning you have, and the more gains will reflect positively in your favor, but it does increase risk too. This means that a lot of getting the ‘right’ trade size will come down to how you balance your lots to best increase gains while minimizing unacceptable risks. This will come down to the risk you find acceptable, calculated as a percentage, the pip costs and the stop point you set.
A big part of minimizing this risk and determining the right lot size will be getting the pip costs right. A ‘pip’ is the measurement of change in currency value against another currency. It’s a tiny percentage of the currency’s value, which is why you need to trade large amounts to see any kind of significant profit.
You can calculate the right pip for your lot by taking your trade risk [typically 1%, or a loss of no more than 1% of your balance] and dividing it by the number of pips you should risk. As an example, if you have a $20 000 account, your 1% risk is $200. If there is a 10 pip stop order, then your risk is $20 per pip. Now you need to find a lot that matches that risk and you’re ready to trade.
Forex trading hinges on getting the right lot size, pip cost and risk for the results you want. CM trading can help you open a Forex trading account today, and get you started with a host of resources to help you manage your lots and make a success of your Forex trading.
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HIGH RISK WARNING:
Trading Foreign Exchange (Forex) and Contracts for Differences (CFD’s) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.