How to calculate trading size
When making a trading decision, it's important to manage your risks. Most risk management strategies are simple to follow. Most professional traders never risk more than 1 to 5 % of their trading capital. But how to calculate the trading size? How much lot should you trade, your risks to be around 1 % of your trading capital? The calculations are not that difficult.
Let’s imagine that a trader has just opened 1 standard lot for USD/JPY. What this means is that they want to buy 100,000 Yen worth of dollars.
Let’s say that the exchange rate is 1.3, meaning 1 JPY = 1.3 USD (this is not the real exchange rate of USD/JPY).
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 × 1.3}
This means that the trading size is $130,000. If the exchange rate was 1.4 then it would be $140,000.
To calculate how much 1 pip will earn, the USD/JPY pip count for 1 standard lot is equal to 1000/130.000 (If Exchange rate is 130,000) = 7,69 USD.
You can manually calculate the trade size and risks to rewards when you know potential profit target in pips as well as stop loss target. You can also use trading calculators that are offered by majority of Forex brokers. What's great about cTrader platform, is that the calculation is automatic. Which means that you simply fill in the amount of pips, and it will display your risks and rewards in terms of money. Then you can adjust the trading lots to fit your trading strategy.
Understanding the meaning of lot in Forex is essential as it helps traders to place right sized trading orders.
Lot terms and their usage
You will meet lots in various contexts. Let's discuss each to better understand lot meaning in Forex.
- Round turn lot
- Partial lot
- Lot
Round turn lot
Forex brokers often talk about round turn lots when they're talking about trading fees in terms of commissions. 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. The main source of income for Forex brokers are trading fees. They get paid using spread markups or commissions. Usually, brokers offer spread free accounts (which are taxed using commissions) or commission free accounts (that are taxed using spread markups). It's essential to learn how trading fees are collected to avoid opening an account with brokers that charge too much.
Partial lot
Trades can be open in partial lots, for instance, instead of 1 lot, you can purchase or sell 0.1, 0.2, 0.5 etc. lot sizes. For instance, 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. Position is still active, but only 0.5 lot size is left. Opening partial lot sized positions and closing orders partially is highly popular in Forex. Closing orders partially helps traders take profits and still remain in trending markets. They also often use trailing stops or move stop loss orders manually.
Lot
In trading, lots have various sizes to make trading accessible for traders that are short in funds. As already mentioned, there are Standard, Mini, Micro and Nano lots. Trading using Nano lots is not recommended as profits will be tiny. Many brokers are not offering trading using nano and micro accounts. However, when it comes to testing trading strategies live without risking too much capital, micro and nano trading accounts come handy.
What is a nano lot? What do sizes change?
Lot in forex meaning is critical for proper risk management. Beginners usually choose anything besides standard and mini lots. Trading using standard lots requires having a large trading capital.
It is much more likely for beginner traders to have smaller budgets, which is why nano and micro-lots are typically the most popular. As already mentioned, professionals are using nano and micro accounts for testing strategies live. There's one more reason to use small trading accounts. If you are opening a trading account with a new broker, a small trading account will help you understand the broker's policies and trading fees better.
Many
trading platforms have their own methods of calculating lots. Some are more user-friendly platforms, which makes order placement much simpler.