Without a doubt, the forex market can generate ridiculous returns, and for novice traders, it’s a good place to start. However, as promising as this prospect looks, the chances of becoming successful are very slim without adequate understanding of the market.
One of the most common questions asked by novice traders who want to become successful is the ideal lot size to begin with. Lot sizes can be confusing, especially when you are beginning, but we’ll get into the details; no need to panic.
Why Does Lot Size Matter?
Lot sizing is a bit different in the forex market compared to other markets. However, once you understand it, it’s actually quite simple. It’s vital to note that the lot size directly affects and specifies the amount of risk you’re taking.
A lot is basically the smallest size available to traders that they can use when trading currency pairs in the forex market. Lot size matters, and it directly affects the extent that market shifts will affect your account. For instance, a 50-pip movement occurring on a small trade won’t be felt as much as a similar shift on a substantial trade size.
There are a couple of lot sizes used in forex trading, but the most important ones are Nano lots, micro lots, mini lots, and standard lots.
Currently, the Nano lot is the smallest lot you can get from a broker; but, not all brokers offer them. A Nano lot is a lot of 100 units of a trader’s account funding currency. For instance, if you have a dollar-based account, the lot’s worth is $100 of the currency you’d like to trade.
With this kind of account, you’re eligible to start trading with as little as 25 USD. What’s more, trading with a Nano lot is ideal when you’re testing some new tactics in the actual market.
A micro lot consists of 1,000 units of a trader’s account funding currency. This means that if you have a dollar-based account, the micro lot is worth $1000 of the currency you’d like to trade.
If you’re trading a dollar-based pair, one pip will be equal to 10 cents. Get two micro lots if you’re a novice who wants to keep risk at a minimum as you hone your trading skills.
Before Nano lots and micro-lots, there were mini lots. A mini lot is equivalent to 10,000 units of a trader’s account funding currency. This means that if you have a dollar-based account and you’re trading a dollar based-currency pair, each pip you trade is worth about $1 each.
Therefore, if you’re a novice trader and would like to begin your exploits with a mini lot, ensure that you have adequate capital. While $1 for each pip seems like a negligible amount, in forex trading, the market can move 100 pips in one day, sometimes even in one hour.
If the market is working against you, it means you’ll incur a $100-dollar loss in such an instance. Therefore, it’s up to you to determine your ultimate risk tolerance. To practice forex trading with a mini account, you need at least $2000 to be at ease.
A standard lot is equal to 100,000 units of a trader’s account funding currency. This means that if you have a dollar-based account, the micro lot is worth $100,000 of the currency you’d like to trade. Trading using this lot means that your account will vary by $10 for a one-pip move.
If you only have $2000 in your account, which is the minimum balance required for standard lots, it means that a 20-pip move can cause a 10% variation in your account balance. As a result, most investors with small accounts tend to shy away from standard lots.
Most traders you come across will be using micro and mini lots. It might not seem profitable, but keeping the lot size at a level that’s equal to your account size will help you maintain your capital and continue trading for a long time.
To sum it all up, if you’re about to venture into the forex market, you should be thinking deeply about your lot size. This is because a lot size will help maximize your profits and curb losses to a manageable value. So, if you’re a novice trader, start from the lowest and work your way up.