A client of ours Adam B recently asked us for advice on the differences between lots sizes offered by various brokers regarding currency translation and fees and so on and so forth, which we’re going to lay out together here to hopefully solve the problem for both Adam and for you, too.
Understanding lot sizes is crucial because it plays a really important part in risk management, which is the foundation of successful trading. When it comes to risk management, it’s all about making sure that we correctly size each trade that we take, each position that we open, to ensure we’re not trading too big of a size relative to our treating accounts balance.
Let’s start by defining the three available lot sizes; Standard, micro i.e. 1000, 10,000 and 100,000 “units” within each. And for those of you who don’t quite know this yet a lot is a unit which measures a transaction amount.
So when an order is placed on your trading platform, these orders are placed in lots, okay.
Regarding actual market-price on the other hand, if we take foreign exchange as our example here, the change in the currency value relative to another currency is measured in pips, which is a very, very small percentage of a unit of a currencies’ value.
Broadly speaking, you need to trade large amounts of a particular currency in order to see any significant profits or loss. As again, the pips-movements is a very, very small percentage of a unit of a currency’s value And as the market moves, the pip-value will also move to either up or down depending on your trade position.
So how do we determine the best lot size to trade? Well, as a helping hand, we’ve actually taken the time to prepare an Excel spreadsheet for you that you can use to determine the right lot size for you, your account size and so on. And before we go any further, I do just need to thank our team member Azri for actually building this for us. Both this piece of writing, and the spreadsheet itself too.
Inside the sheet, all you’ve got to do is change the variable highlighted in yellow and your ideal position size will be automatically calculated for you. With the sheet in hand, you will know exactly how much you’re about to risk before you enter any future trade. And this is an example of really great risk management principles.
Next let’s briefly go through the differences between a micro lot, a mini lot, and a standard lot.
So firstly, a micro lot, which is the smallest tradable lot available via most brokers is a lot of 1000 units of your accounts’ funding currency. If your account is funded in let’s say US dollars for example, this means that a micro lot is $ 1,000 worth of the base currency that you actually want to trade.
So if you are trading a dollar-based foreign exchange pair in this case, one pip would be equal to 10 cents. Micro-lots are a great way for beginners to keep risk to a minimum while just practicing their trading. And it’s also highly recommended for new traders to stick with those, to trade using micro lots, instead of let’s say a demo account so that they can actually feel the sense of emotion that comes with trading live, and this is also known as having skin in the game.
Next before micro lots, there were mini-lots and mini-lots are 10,000 units of your accounts funding currency. So if you are using say a dollar-based account and trading a dollar-based currency pair, each pip in your trade will be worth about $ 1.
And if you are a beginner and you want to start trading using mini-lots though, make sure that you are well capitalised. It’s recommended that you start with, I would say a minimum of let’s say $ 2,000 to start trading these mini-lots due to their sizing.
So while $ 1 per-pip might seem like a small amount, the market could well move say 50 pips, 100 pips plus in a single day, sometimes in a single hour. And if the market is moving against you, that can add up to a $ 100 loss, which would mean that your account is gone just like that.
And finally, a standard lot is a 100,000 unit-lots. So that’s a $ 100,000 equity position, if you are trading in dollars. Trading with this size of position will generally means that your account-balance will typically fluctuate by roughly $ 10 for each single pip that the market moves.
For a trader that has, let’s say $ 2,000 in their account, usually the minimum required to trade a standard lot, that means that a 20-pip move can make a 10% dent in your account balance, either positive or negative.
Most retail traders with smaller accounts don’t trade standard lots. Most traders that you come across are going to be trading either mini-lots or even micro-lots. And it might not feel glamorous, but keeping your lot size within reason within relative to your account size will help you preserve your trading capital to continue trading for the longterm.
And at this stage, I’d just like to share an analogy with you about lots sizes…
Picture this; You’re about to go sailing in the Pacific ocean and you have a choice between a small wooden boat, a fishing charter, or a cruise ship. Given your budget, you can only afford a small wooden boat.
What happens if you still go out, and still go ahead and sail in the Pacific ocean using this small wooden boat? Well, a quick change in the tide or a quick changing weather could easily capsize your boat and, poof, you’re toast. You’re gone. You’ve sank faster than a 100 until an anchor, right?
But having said that a better decision with only a small wooden boat will be to avoid the Pacific ocean and instead fish in a much smaller river to give you the best chances of survival and successfully pulling fish out of the water, much like we pull dough out of the markets.
My point is this; Start small, grow slowly and steadily, and prosper over the long-term.
I hope that analogy helps you to understand that it’s all about balance, and depending on your trading account balance, that will inform the decisions that you actually make and which lots you actually trade.
I hope that helps.
– To your success.
Will (and team).