How to calculate trading volume
In order to determine what volume Forex trading is, we need to bring an example of FX trading lots. Let’s imagine that a trader just opened 1 standard lot for JPY/USD. What this means is that they want to buy 100,000 Yen worth of dollars.
Let’s say that the exchange rate is 1.2, meaning 1 JPY = 1.2 USD (this is not the real exchange rate of JPY/USD).
So, upon opening this trade, the trader will be given a trading volume which is calculated with the following formula.
{Lot size x exchange rate} = trading volume
So in the case of our example, the formula would work like this.
Trading volume = {100,000 x 1.2}
This means that the trading volume is $120,000. If the exchange rate was 1.3 then it would be $130,000.
How it works with different trades
The amount of trading volume will depend on which position the user opens as well as the FX lot size they go for. There are 3 types:
- Round turn lot
- Partial lot
- Lot
Round turn lot
When a trader opens a buy trade, but then closes it with a sell trade, we call that a round turn lot. The volume here is calculated in both ways, meaning that the trader gets the trading volume for both buy and sell positions.
Step 1: Buy position gives the trader 1 lot in volume because that’s what he or she “buys”.
Step 2: The sell position also gives the trader 1 lot as they exchange for the same currency they did previously.
Step 3: We combine the two trading volumes and gain 2 lots in total trading volume.
Partial lot
What is a lot in Forex trading but a feature for strategies? One of these is called the partial lot. When a trader opens a buy order for 1 standard lot but closes it with a sell order of 0.5 standard lots we call it the partial lot. This means that the trader did not close their buy position completely and still has some volume pending.
In this case, we would calculate the volume like this:
- Step 1: Buy position gives the trader 1 lot once again.
- Step 2: When he/she closes only half of the lot with a sell position, he/she gets only 0.5 lot in trading volume.
- Step 3: We combine the two trading volumes and get 1.5 lots. That’s the whole trading volume for one partial lot.
When only half of the lot was closed with a sell position, the volume of that sell position was halved as well.
Lot
A regular lot can be any size. But what does size change? What is a standard lot? What does it change?
So if a trader opens a buy trade with a JPY/USD exchange rate of 1.20 for 1 standard lot, the regular lot’s trading volume will be just 1 lot and nothing more. No more volume will be added until the trade is closed.
What is a nano lot? What do sizes change?
Beginners usually choose anything besides standard and mini lots. This is because of the number of funds that need to be used.
It is much more likely for beginner traders to have smaller budgets which is why nano and micro-lots are usually the most popular.
But why would a beginner want a Forex trading volume indicator through these lots? What do they get out of it?
Well, there are a few reasons, but one of them is the most important.
The no deposit bonus. This is a “benefit” that companies usually give to their customers. It’s basically funds that the company gives you as a trader to trade with. They cannot be withdrawn unless you trade a specific amount of volume.
For example, if the company gives you $100 as a bonus, it is likely that they will ask you to trade 10 times more in volume to withdraw it. If we do the math, we can see it would be equal to one micro lot, or $1000.
Once that volume is reached, the $100 given as a bonus is yours.
Lots and volume are mostly part of MT4
Now that you know what is a lot size in Forex trading, it’s important to note that it’s mostly part of one software, MetaTrader 4. That’s right, MT4 is where lots were first used and are used today.
Other software has its own methods of calculating lots or trading volume but is still similar to how MT4 does it. For example, cTrader simply calls them units, but they have pretty much the same formula as well.