It’s pretty simple no need to stuck and getting into complexities as a forex retail trader so let’s see in this post how to calculate and understand in a short way, what is lot sizes in forex trading? & how to calculate lot sizes according to currency pairs and account sizes that’s your equity aka account balance to trade.
The lot size is the most important aspect of forex trading if you are a beginner trader or still learning how to trade forex without understanding lot sizes according to your equity is just like you are doing money management without using math and just guessing the numbers without parameters exactly so it’s important to know exactly what is it and how to calculate it.
It doesn’t matter on which platform you are trading the order volume selection is classically the same idea of choosing how much units you are willing to sell or buy for a particular pair. Let’s understand simply using the market king terminal/software trading platform called MT4/MT5 Meta trader 4/5 by Metaquotes Software Corp can be easily usable on android, IOS, Windows & Mac.
There are Three Types of Popular Lots Standards Following which can Clarify the General Concept.
|Standard Lot||Mini Lot||Micro Lot|
|Denoted As 1.0 in MT4/5||Denoted As 0.10 in MT4/5||Denoted As 0.01 in MT4/5|
|100,000 Units of Base currency||10,000 Units of Base currency||1,000 Units of Base currency|
|Pip Value $10 For USD Pairs||Pip Value $1 For USD Pairs||Pip Value $0.1 For USD Pairs|
To simply calculate the lot size you should take it just clarified with the formula of equity multiply by percentage of risk you are willing to take and divided by the pips you are gonna setup the stop-loss which will identify the position size or lot size for your trade(To identify the margin you required for remains opening your trade while a position is against you until it goes to your favor or hit stop-loss) to understand more clearly here is the example below.
Equity×%Risk/No. Pips = Lot size
Let’s take a fictionary Account of USD currency having the Account balance/equity of $100 and ideally and preferred risk tolerance should be on per trade is more than enough and seasoned approach is 1-2% and we take the high percent and take 2% of risk which will be in the amount $2 and which mean I am ready to lose $2 if my trade goes wrong which will be worse case scenarios hit stop loss.
Now, what should by using the rule to calculate lot size by dividing the $2 on the number of pips where my stop loss will trigger which is for example currently EURUSD is on a price 1.18333 and I am gonna buy it at this exact price and my stop loss will be exactly below the price of 1.18161 just below the hourly support and which give me 172 pips stop loss so to know the exact lot size I should divide the amount of risk $2 on the numbers of pips which will be calculated as equals to 0.0116279069767442 and the final lot size will be simple As Micro Lot 0.01 can be taken On my account as a good money management rule.
Hope the above calculation not cause you confusion, try to clarify you lot size concept because it is the great fundamental for retail traders to avoid psychological-emotional in-discipline and give you the right path while trading and understand you to make the right trades in the right direction instead of imaginary trades illogical lot sizes and account wipeout from the equity in a single trade as beginner understanding lot size and maintaining and calculating it according to rule in your trading give you more breathing room and consistency in the trading journey along with suitable steady income instead of get rich quick too much risky techniques.
Unknowingly if you divided the risk amount to No. of pips and get the value below even the micro lot For Ex: 0.009 or 0.003445 something then there is an issue that you have to understand you cannot set stop loss too far away from the position if your equity equals to $100 or below according to the leverage you have taken. Ideally and even recommendation is that the 1 pip value of a micro lot is $0.1 and the 2% risk No. of pips will not bigger than the 20 Pips. If you want to set stop loss far away from the position too long to remain open in negative then you have to (extremely discouraged this approach) increase your risk percentage/amount or top up your equity/account balance to get a suitable lot size for your trade within 3 market standards.
Note. The pip value of other than USD pairs is different according to their exchange rates and depending on your account base currency such as USD, EUR, JPY GBP, etc.
If you want to avoid the hurdle of calculating lot sizes again and again you can simply visit the below link and select the base currency of your account and enter the required fields such as account balance and percentage/amount of risk you want to take, select the currency pair and enter your number of pips you want to set stop loss and simple hit calculate button here you will found your suitable lot size approximately according to your account equity/balance.