How Many Lots Should You Trade To Be a Consistent Trader?

June 01, 2024, 9:13 AM | The content is supplied by a Guest author

Lot size matters in forex for so many reasons. For one, their sizes come in four different types, and for every size you decide on, a different level of risk is attached. Also, the larger the size, the more money you have to put into your positions. Understanding lots in the forex market makes all the difference, especially if you're looking to manage your risk and maximize potential profits. This article gives a detailed breakdown of lot size relevance in your portfolio and how to leverage the concept for consistent and profitable trades.

Lots in Forex Explained

Lots is simply the unit of measurement used across the board in forex investments. It is the standardized trade size for foreign exchange trading. Investing in singular units doesn't work in the market, so lots make it easy for investors to trade these smaller units in large batches. The value is the same for all market participants and is regulated to be consistent. Lot sizes are subdivided into 4 major types: standard, mini, micro, and nano. The value reduces as we go down the list, so standard lot sizes are the bigger unit of measurement while the nano is the smallest. The differences in these sizes help traders measure smaller units and work around lesser orders conveniently.

The standard lot size is measurable by 100,000 units of the base currency in a trade. The base currency is the first that appears in a currency pair. For example, in a EUR/USD pair, EUR is the base currency. If the EUR/USD exchange rate is $1.5000, a standard lot in this scenario would be 150,000 units. To buy 100,000 units of EUR, you need 150,000 units of the USD. A mini lot size is one-tenth of the standard lot size, the micro is one-tenth of the mini, and the nano is one-tenth of the micro. This makes the values of mini, micro, and nano lots in this same scenario 15,000, 1500, and 150, respectively.

How Many Lots Should You Trade?

Like many other decisions in the forex market, choosing lots sizes hinges on the risks you're willing to take, the amount of money you can put into the position, and the leverage you need to use. The risks involved in these sizes differ because you're putting less money into a nano than expected for a standard. Most professional traders use standard, and while it comes with more risks, it also means you're maximizing possible profits. However, as a general rule of thumb, factors to consider when making these decisions are account size, stop loss level, and risk tolerance.

A general principle is that traders risk no more than 1–2% of their account on every position. Another factor that is quite similar to this is how much loss you're willing to tolerate. It's a personal decision you'd have to take based on your existing trading goals and strategies. Your stop loss level matters as well because you need to determine the price level at which you will exit a market moving against you. In addition, implement position sizing and be sure it aligns with your loss tolerance level. Another tip that can help is to practice demo lot sizing more often, especially if you're new to the process. This helps you refine your strategies and get better before putting real money into the market.

How To Calculate Your Lot Sizes

Trading platforms like MetaTrader 5 are innovations that take the trouble of calculating lot sizes off your hands. In most cases, you won't have to calculate this yourself, especially if you're using these trading applications. For example, the auto lot size on the MT5 platform is a feature that helps investors automatically calculate their lot sizes, following predetermined risk percentages. There are many other tools and resources of similar use, and you can consider incorporating them into your routine. In addition, most brokers offer offline calculators for lot size, pip, margin, and other related concepts you'd need when making a trade.

However, if you need to calculate it yourself at any point, you can get the value of your lot size using the formula below.

Lot size = Risk amount * account balance/stop loss in pip * pip value.

For example, with the following parameters as an example, the lot size would be (0.225 lots or 22,500 units):

Risk tolerance = 3% (0.03)

Account balance = $1500

Value of 1 pip = $0.0001

Stop loss = 50 pips

Lot size = 0.03 * 1500/$0.0001 * 50

Mastering Lot Sizes for Profitability

As your market grows, you need to make necessary adjustments to accommodate the changes. Whether you've made more profits or lost a little, review your account regularly and adjust your risk management plans to account for the changes in your trading account. The secret is to understand how the system works. With every new position and trade, you get to broaden your practical knowledge of using lot sizes to balance risk and profitability.

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