3 Types of Forex Trade Sizes
01/21/2016 9:00 am EST
The key to profits in the forex market often depends on the correct position size, so Rob Pasche of DailyFX.com, explains the three kinds of lot sizes that forex brokers typically offer.
Ten-20 years ago, forex brokers typically offered only one contract size, 100,000 units of currency. So when a trader said they wanted to trade one (lot), that meant they were trading 100,000 units. But over the course of the last decade, as technology became more efficient and transactions costs decreased, forex brokers began offering lot sizes in smaller increments. This required new terminology to describe what amounts we were actually trading.
A micro lot is the term used for a 1,000-unit trade, which on most major pairs come out to about $0.10 of risk per pip. This is the smallest trade size available and is a great size for traders who don't have much capital to trade. Using DailyFX's usual Rule of 10, we would want to have at least $100 in our trading account per micro lot that we wanted to trade at a time. You won't make a fortune, but you won't lose too much either trading micros, that's why it's a great place to cut your teeth in forex.
A mini lot is the term used for a 10,000 unit trade, which on most major pairs means we are trading $1 a pip. Trading mini lots packs a punch 10x larger than a micro lot, so we want to make sure we are properly capitalized before trading them. We recommend having at least $1,000 deposited into your account for each mini lot you plan to have open simultaneously. It's a good trade size for a serious part-time forex trader who has the capital or a full-time trader wanting to start with a smaller lot size.
A standard lot is the term used for a 100,000 unit trade, which on most major pairs means we are trading $10 per pip. We want to make sure we are fully prepared for large swings of gains and losses we can face when trading standard lots. Gains/losses could reach $1,000-$2,000 or more per standard lot on a fairly common day in the forex market, so having a larger account size is mandatory to trade them seriously. Our account should have at least $10,000 per standard lot we are looking to trade, which normally means you are very serious trader in the FX market, part-time or full-time.
Trading EUR/USD with Different Lot Sizes
In the image above, we can see what each trade size translates to in an actual currency pair, the EUR/USD. Notice the trade size refers to the first currency in the currency pair, in this case euros for the EUR/USD pair. So a micro lot, mini lot, and standard lot means ?1,000, ?10,000, and ?100,000.
Open a forex trading demo account and place a 1k, 10k, and 100k trade across three different pairs. This will give you a good sense at how trade size affects the profit/loss on your currency positions.
By Rob Pasche, Trading Instructor, DailyFX.com