What is a lot size in forex?
In this article we will see what a lot in forex is and how a lot size in forex can be classified.
For instance there are different lot sizes in forex, each of them with a different value.
When trading, each selected lot size in forex involves a different amount of money.
This can range from a micro lot which is equal to 0.01, to a standard lot (1).
What is a lot in forex?
A lot represents a unit of measure in a Forex transaction. Thanks to this it’s possible to know how much money a trader needs to use for a single trade.
The smallest lot size in forex is called a microlot and it’s worth 0,0. There’s then the minilot which is 0,1 and it’s the medium size.
However, there’s no limit to the highest amount – even if some brokers set a maximum of 20 lots for every single trade position.
A standard lot size forex (1) represents 100.000 units, but this doesn’t mean that a trader should have $100.000 in their account.
Let’s explain this better with an example.
Example of lot size in Forex
In forex trading, a very important factor is the leverage.
In fact, if the chosen leverage is 1:200, it’s just necessary to have $500 to open a position of 1 lot.
We know that this concept can sound a bit complicated, but to keep it simple when trading just remember what the starting leverage is.
Once you have the starting leverage, you just need to divide 1 lot (so 100.000) for the leverage (200 in this case). The result represents the amount of money you’re going to invest for that position if you decide to open 1 lot.
So this would be $500 in our example.
If $500 is too much for a single investment, it’s possible to select a lower amount of lots, for example 0,1 lot and invest just $50.
How to set up the lot size on Metatrader 4
When trading on the MT4 or Metatrader 4, setting up the size is essential.
To trade, it’s necessary to press the F9 button and the trading window will open.
There in the volume window (as you can see in the picture), it’s possible to set up the desired lot size.
Finally, to complete the trade, you just need to enter the stop loss and take profit values. You must also decide if you want to sell or buy.
Each forex broker platform will have a different trading window layout. So you can take your time getting to know all the features and how to set up the stop loss etc.
Many brokers offer free forex demo account versions, so new clients can practice trading for free with a set amount of virtual funds. This practice can include opening positions and trying out different combinations of lot sizes and leverage.
How to set up the lot size in a forex platform
The minimum lot size which can be selected is the microlot, so 0.01 lots. To set up the lot size, you need to open up the trading window on your selected forex platform.
Some brokers offer you the chance to trade whilst deciding directly the amount of money you wish to invest in each position.
This might be a big help for beginners who have some difficulties understanding the amount of money invested on lots.
Another big help some trading platforms offer, is the margin call.
What is the Margin Call
The margin in forex represents a minimum quantity of money which must be in the trading account before a trade can be opened.
Every broker has a different margin requirement, usually between the 1% and 2%.
This means that to open a position with 1 lot (100.000 units) a trader needs to have at least $1000 funded in their account.
Because the 1% of 100.000 units are 1.000 units which represent $1000.
An alternative for the trader can be to open a position with 0.01 which is exactly 1.000 units.
A margin call will happen in the case the trader does not have enough money in their forex account to trade.
If this happens the broker will send a message or an email asking for a new deposit. Alternatively they could also stop the trade automatically.
Click here to learn more about how to trade Forex: https://tradingonlineguide.com/what-is-forex-trading/how-to-trade-forex/
Author of this article and founder of Tradingonlineguide.com
My aim is to help you increase your trading knowledge with helpful content. I come from an economic background and have a strong passion for forex trading. With more than 6 years in the online trading world, I want to share my financial knowledge so that anyone can develop their investment skills.
In my spare time I enjoy cooking and travelling.
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