If you are new to the foreign exchange market and you do not know exactly what a lot is in Forex and what it is all about, in this article I am going to show you what it is and how to know what amount you should use or what amount in lots you should use in your case for Forex trading.
What are pips and lots
The first thing you should understand is that pips and lots are two concepts in the forex market that are related when calculating the profit or loss in a movement that a currency pair can make.
The pips measure how much the currency in question varies and the lots the amount you buy or sell of that currency cross. Therefore, the more it fluctuates in pips and the more you have bought or sold, the more it will affect your account.
How many units make up a lot in Forex
When you trade in the foreign exchange market you do it as if they were in a pack. What does this really mean? a lot are 100,000 unitsSo, for example, if you make a purchase in the EUR/USD pair of one lot, you are making a trade worth $100,000. These types of operations can be done even with much less money in your account, since brokers offer leverage for it.
What is a micro lot and a mini lot
You may be thinking that leveraging yourself for $100,000 doesn’t sound very good to start with. Definitely not. Therefore, it is possible to do it for the minimum possible and that is where mini lots and micro lots come in.
Mini lots are one tenth of a lot, so if a lot equals 100,000 units, when you trade a mini batch in EUR/USD you do it for a value of 10,000 dollars. Well, this is something else, but what if I want to do it for less? it’s possible? Yes, there is also the possibility that you operate with a micro lot, that is to say 1,000 units. Following the previous example, $1,000.
How to Calculate the Value of a Forex Lot
Having understood all these, now I am going to explain how you can know the value of a lot in a currency and how each change that occurs in the price will affect your account.
Step 1: Choose the currency pair. GBP/JPY.
Step 2: Calculate how much a pip is worth. In most cases the pip on a crossover is to the fourth decimal place. In the crosses with the JPY it is the second (yes, I have put it on purpose so that you can learn it well).
GBP/JPY is currently trading at 175,150
If GBP/JPY moves and its price goes to 175,170 it will have changed two pips (175,170 – 175,150).
How much is this variation in my account with a micro lot?
1000 units * 0.02 = 20 yen.
Step 3: Calculation in your currency. How much does this mean if you materialized your account in dollars? We just have to do a conversion by looking at the USD/JPY rate, which is currently trading at 107,750. Therefore, if one dollar equals 107,750 yen, 20 yen equals 0.18 euros.
That is to say, that the change of two pips in our account implies a variation of 18 cents.
Shall we put another example for the classic EUR/USD?
Step 1: We have it, EUR/USD.
Step 2: Suppose EUR/USD ranges from 1.12500 to 1.2490.
We have previously mentioned that in most pairs, one pip represents the minimum variation in the fourth decimal place. This is the case, a decrease in the price of the pair of 10 pipettes or 1 pip.
If in this case you have bought a mini lot (10,000 units):
0.0001* 10,000 =1 dollar per pip.
You would be losing a dollar plus commissions in this scenario.
Step 3: What happens if your account is in euros?
1/1.12500 = 0.88 euros. It would vary instead of one euro, 88 cents.
Just as we have calculated the value of one pip in the latter case or two in the former, we can do it for 100 or 200 and so on depending on the entry and stop price calculate what is the maximum you can lose or win in each operation. Easy, right?
All understood? Shall we go for the last point? If something is not clear to you or you have made a bag, leave it to me in comments and I will solve it for you as soon as I read it.
Ok, Ruben. I have understood everything, but I find it a pain to have to be doing these calculations to be able to calculate the potential losses and profits in each operation. Relax, I have a solution for you, here is one calculator where to do all this in a simple way.
You only have to choose the currency of the account, the balance (use the equity), percentage that you are willing to risk and stop loss in the currency cross that you have chosen. From here the rest is calculated automatically as you will see.[/et_pb_text][et_pb_code text_orientation=»center» _builder_version=»3.22.7″]Position Size Calculator widget is provided by DailyForex.com –Forex Reviews and News
Yes, I could have given it to you sooner, but I wanted to make sure you understood all of this.
Commission per lot in Forex
You already know how lots and pips work in the forex market. I have previously told you that brokers allow leverage, so in Forex you will be able to move amounts greater than what you have in your account.
First of all, be very careful with all this. Leverage generates higher potential profits, but also potential losses that can mean the end of your account. Now, leveraging here in a controlled manner is something else. Why does the broker allow you to leverage yourself and move more money than you really have? Because he is interested, that means more commissions for him. The more volume there is in quantity in the market, the more money you are going to receive for it. Even with all this, I have to tell you that competitive brokers allow you to move up to $100,000 by paying only 7 dollars in commissions. The cost is relatively low to finance the operation.
I recommend that you practice all this in a demo account so that you do not have any doubts. The above calculation can help you to do your calculations, but it’s ok to start by doing it yourself manually and then check if it’s ok. Likewise, as you learn and progress, my advice is that you can automate all this so that there is no miscalculation. Remember that every failure here costs money.
In the end, you have already seen that this thing about pips and lots is not complex at all, everything is to stop carefully to understand how it works and make a couple of practical examples like these.
Thanks for reading me again.
If this post has helped you, stop by to say hello in comments, That’s how I meet you and we exchange opinions!
I send you a hug.