Forex Lot Sizes and Risks
What is lot size and what's the risk?
Currencies in Forex are traded in Lots.
A standard lot size is 100 000 units.
Units refer to the base currency being traded. For example, with USD/CHF the base currency is US dollar, therefore if to trade 1 standard lot of USD/CHF it would be worth $100 000.
Another example: GBP/USD, here the base currency is British Pound(GBP), a standard lot for GBP/USD pair will be worth £100 000.
There are three types of lots (by size):
Standard lots = 100 000 units
Mini lots = 10 000 units
and micro lots = 1000 units.
Mini and micro lots are offered to traders who open mini accounts (on average from $200 to $1000). Standard lot sizes can be traded with larger accounts only (the requirements for a size of standard account vary from broker to broker).
The smaller the lots size traded, the lower will be profits, but also the lower will be losses.
When traders talk about losses, they also use term "risks". Because trading in Forex is as much about losing money as about making money.
Risks in Forex refer to the possibility of losing entire investment while trading. Trading Forex is known as one of the riskiest capital investments.
Returning back to lots:
With every Standard lot traded (100 000 units) a trader risks to lose (or looks to win) $10 per pip. Where Pip is the smallest price increment in the last digit in the rate (e.g. the smallest price change/move).
With every Mini lot traded (10 000 units) a trader risks to lose (or looks to win) $1 per pip.
With each micro lot (1000 units) - $0.10 per pip.
In Forex traders always search for the most efficient ways to limit risks or at least lessen risk effects. For this purpose various risk management and money management strategies are created.
It is impossible to avoid risks in Forex trading. In order to limit risks traders use methods of setting protective stops, trailing stops; use hedging techniques, study scalping strategies, look for the best deals on spreads among brokers etc.
Traders with the best risk management strategy earn the largest profits in Forex.
Would you like to add your own comment or ask another question?
Discussions speed up learning. Let's talk.