We have discussed various intricacies of the Forex market such as predicting trends, how to read forex charts, how to use various indicators to help us anticipate a market breakout, etc. If you spend some time reading about Forex, there are a few things that just seem so fundamental that people do not discuss them in detail. One of them is lot size. Here, we will discuss what lot size means and how to use a lot size calculator.
What is a Lot size?
What is a lot? A lot is basically a unit of currency in Forex transactions. It comes in many names such as position size, but they all mean the same thing. However, lot size here does not mean land size, those measured in acres for example. That is a different thing, so you can’t find a lot size calculator to acres or a property lot size calculator, at least in the context of Forex.
When you trade Forex, you trade a specific lot size and there are different lot sizes. You have the standard lot, mini lot, micro-lot, and nano lot, which has 100,000, 10,000, 1,000, and 100 units respectively. So how does this play into Forex?
Pip Value and Pip Calculator
This is where pips come in. A pip is a unit of measurement for the fluctuation of a currency’s value. More often than not, this change is very minuscule. A pip here is the smallest decimal of a currency pair, usually 0.0001 or 0.01. So if you are trading EUR/USD and make a profit of 1 pip from trading a unit, you would make a hundredth of a cent. That is nothing. But what if you trade a standard lot or 100,000 units? You get $10. Much better.
So, you want to magnify your profit by trading in a larger unit so that even a pip in price change results in a tangible profit. This is where the lot size comes in. Suppose that you are trading USD/JPY using a standard lot size (100,000 units). Let’s say that the USD/JPY exchange rate is 119.70. Keep in mind that a pip in JPY is 0.01. How much is a pip worth at that scale?
Pip value = (0.1 / 119.70) x 100,000 = $8.35 per pip.
But if the USD is not quoted first, then you use the same formula, except you multiply the result by the exchange rate again. Suppose that you are trading EUR/USD and the exchange rate is 1.1925. You trade using a standard lot size again. Unlike JPY, a pip is 0.0001 for EUR and USD. So how much is a pip worth?
Pip value = (0.0001 / 1.1925) x 100,000 = 8.39 x 1.1925 = 10.005075 rounded down to around $10 per pip.
Now that is a healthier chunk of profit. It still looks small, but keep in mind that this is only for a change of a single pip. More often than not, price changes occur in the magnitude of several pips, so you can see how the number adds up.
Lot Size Calculator App
Now, you might be thinking, “Oh, God. More math?” That is totally understandable. No one wants to pull out a calculator to measure exactly how much profit they can expect from a currency value change of a pip. Here’s a piece of good news: your broker will do that for you.
Different brokers might have different ways to calculate the pip value based on the lot size, but they will tell you the pip value. You can also find various lot size calculator apps on various platforms. MetaTrade4 also has its own lot size calculator MT4.
Alternatively, if you don’t trust those apps or that from your broker, there is a forex lot size calculator excel file available on the internet. Most of these files are created by your fellow retail traders and a few simple inputs can verify the calculation from the apps or your broker.
In other words, you don’t have to worry about doing the math. You can just focus on trading.
Lot Size Calculator for Risk Management
Risk tolerance varies between brokers. Some play it safe and others go for the high-risk, high-reward move. So, there are no rules set in stone on how to manage your money in Forex. There are, however, general rules of thumbs and best practices to keep in mind.
Ideally, you do not want to lose more than 1 to 2 percent of your total capital on any one trade. For example, suppose that you have $10,000 in your account. Following this rule, you do not want to lose more than $100. So, you set up your position size and set stop losses to ensure that in the event things do indeed go wrong, you won’t lose more than $100 on one bad trade.
A stop-loss is an automatic bail-out system that limits the impact of a bad trade. Suppose you go long on EUR/USD at 1.1500 and place a stop-loss at 1.1485. If the price goes up, then you keep making a profit, great. But what if it goes down? Of course, you would lose money and it’s just a matter of how much. A stop-loss would trigger when the price reaches 1.1485, closing your position then and there. There is a loss of 15 pips, but at least it’s only 15 pips. The price could go way lower and you could lose a lot more money.
So for position sizing, where to place your stop-loss? Again, this is up to you, although it is considered good practice to set it at a strong support level. A support level is a price point in which the market price consistently does not go below.
The support level is dynamic and a new support level will crop up after a massive price movement. If this results in an upward trend, move your stop-loss up to the new support level. If it’s a downward trend and the price dips through the support level, the stop-loss would trigger at the support level, saving your capital.
Determining your position size relative to your risk and stop-loss requires a lot more math. Again, you can find a lot size calculator that can help. You can download a position sizing calculator excel file, or go to the AsiaForexMentor website for their position size calculator SGD and other currencies. All you have to do is plug in the numbers such as your account currency, account size, risk ratio, stop-loss, and currency pair, and let them do the rest.