Managing Risk

Introduction to Order Types

Orders are critical tools for any type of trader and should always be considered when executing
against a trading strategy. Orders can be used to enter into a trade as well as, help protect
profits and limit downside risk.
Understanding the differences between the order types available can help you determine
which orders best suit your needs and are best suited to help you to reach your trading goals.
Market
A market order is the most basic order type and is executed at the best available price at the
time the order is received.

Limit
A limit order is an order to buy or sell at a specified price or better. A sell limit order is filled at
the specified price or higher; buy limit orders are executed at the specified price or lower.
Limit orders allow you the flexibility to be very precise in defining the entry or exit point of a
trade. Keep in mind that limit orders do not guarantee that you will enter into or exit a position,
because if the specified price is not met, you order will not be executed.
Stop
A stop order triggers a market order when a predefined rate is reached. A buy stop order
triggers a market order when the offer price is met; a sell stop order triggers a market order
when the bid price is met. Both stop orders are executed at the best available price, depending
on available liquidity. Stop orders, also called stop loss orders, are a frequently used to limit
downside risk.

Stop orders help to validate the direction of the market before entering into a trade. It’s
important to keep in mind, that stop orders are executed at the best available price after the
market order is triggered, depending on available liquidity.
Trailing Stop
A trailing stop is a stop order that is set based on a predefined number of pips away from the
current market price. A trailing stop will automatically trail your position as the market moves
in your favor.
If the market moves against you by the predefined number of pips, then a market order is
triggered and the stop order is executed at the next available rate depending on liquidity.

Contingent Orders
Contingent orders combine several types of orders and are used to execute against a specific
trading strategy. Contingent orders require that one of the orders is triggered, before the other
order becomes activated.
The most common types on contingent orders are If/Then and If/Then OCO.
If/Then
An if/then order is a set of two orders with the stipulation that if the first order (known as the
"if" order) is executed, the second order (the "then" order) becomes an active, unassociated,
single order. Unassociated orders are not attached to a trade and act independently of any
position updates. In cases where the “if” order does not execute, the “then” single order will
remain dormant and will not be executed when the market reaches the specified rate. Note
that when either part of an if/then order is cancelled, all parts of the order are cancelled as
well.
If/Then OCO
An if/then OCO provides that if the first order (the "if" order) is executed, the second order (the
"then" order) becomes an active unassociated one-cancels-other (OCO) order. Remember,
unassociated orders are not attached to a trade and act independently of any position updates.
As with a regular OCO order, the execution of either one of the two "then" orders automatically
cancels the other.
In cases where the “if” single order does not execute, the "then" OCO order will remain
dormant and will not be executed when the market reaches the specified rate. When any part
of an if/then OCO order is cancelled (including either leg of the OCO order), all other parts of
the order are cancelled as well.
Expirations of Orders
Market orders are day orders as they are executed at the next available price. However, an
expiry value of End of Day (EOD) or Good Till Cancel (GTC can be submitted for all other order
types.
 End of Day – an order to buy or sell at a specified price will remain open until the end of
the trading day, typically at 5pm / 17:00 New York.
 Good Til’ Cancelled - an order to buy or sell at a specified price will remain open until it
is filled or cancelled. At FOREX.com GTC orders will automatically expire on the Saturday
following the 90th calendar day from the date the order was entered.
NOTE: The range of order types available varies by our trading platforms. Visit platform
handbooks to learn more about the types of orders available to you.

CHOOSING A LOT SIZE IN FOREIGN EXCHANGE/FOREX TRADING

By John Russell
Updated November 27, 2017
What Is a lot? A lot references the smallest available trade size that you can place when trading
the Forex market. Typically, brokers will refer to lots by increments of 1000 or a micro lot. It is
important to note that lot size directly impacts the risk you are taking.
Therefore, finding the best lot size with a tool like a risk management calculator or something
with a desired output can help you determine the desired lot size based on the size of your
current accounts, whether practice or live, as well as help you understand the amount you
would like to risk.
Lot size directly impacts how much a market move affects your accounts so that 100 pip move
on a small trade will not be felt nearly as much as the same hundred pip move on a very large
trade size. Here is a definition of different lot sizes you will come across in your trading career
as well as a helpful analogy borrowed from one of the most respected books in the trading
business.
Using Micro Lots
Micro lots are the smallest tradable lot available to most brokers. A micro lot is a lot of 1000
units of your accounting funding currency. If your account is funded in US dollars a micro lot is
$1000 worth of the base currency you want to trade. If you are trading a dollar-based pair, 1
pip would be equal to 10 cents. Micro lots are very good for beginners that need to be more at
ease while trading.
Using Mini Lots
Before micro lots, there were mini lots. A mini lot is 10,000 units of your account funding
currency.
If you are trading a dollar-based account and trading a dollar-based pair, each pip in a trade
would be worth about $1. If you are a beginner and you want to start trading using mini lots, be
well capitalized.
$1 per pip seems like a small amount but in forex trading, the market can move 100 pips in a
day, sometimes even in an hour.
If the market is moving against you, that is a $100 loss. It's up to you to decide your ultimate
risk tolerance but to trade a mini account, you should start with at least $2000 to be
comfortable.
Using Standard Lots
A standard lot is a 100k unit lot. That is a $100,000 trade if you are trading in dollars. The
average pip size for standard lots is $10 per pip. This is better remembered as a $100 loss when
you are only down 10 pips. Standard lots are for institutional-sized accounts. That means you
should have $25,000 or more to make trades with standard lots.
Most forex traders that you come across are going to be trading mini lots or micro lots. It might
not be glamorous, but keep your lot size within reason for your account size will help you to
survive long term.
A Helpful Visualization
If you have had the pleasure of reading Mark Douglas' Trading In The Zone, you may remember
the analogy he provides to traders he has coached that is shared in the book. In short, he
recommends likening the lot size that you trade and how a market move would affect you to
the amount of support you have under you while walking over a valley when something
unexpected happens.
Expanding on this example, a very small trade size relative to your accounts would be like
walking over a valley on a very wide and stable bridge where little would disturb you even if
there was a storm or heavy rains.
Now imagine that the larger the trade you place the smaller the support or road under you
becomes.
When you place an extremely large trade size relative to your accounts, the road gets as narrow
as a tightrope wire, such that any small movement in the market much like a gust of wind in the
example, could send a trader the point of no return

How to Determine Lot Size for Day Trading

Talking Points:
 Trade size is an important factor of risk management
 Larger lots increase profits and losses per pip
 Use the Risk Management App to simplify your calculations
One of the important steps when day trading, is deciding how big your position should be.
Position size is a function of leverage and while trading a large position may multiply a win, it
can exponentially increase the value of a potential loss. This is why traders should always
consider position size in trading. If too much leverage is incorporated in any given position,
there could be unnecessarily devastating affects to one’s account balance. To help, today we
will review how to determine the correct lot size for your trading.
Determine Your Risk
Before you can select an appropriate lot size, you need to determine your risk in terms of
percentages. Normally, it is suggested that traders use the 1% rule. This means in the event that
a trade is closed out for a loss, no more that 1% of the total account balance should be at risk.
For example, if your account balance totals $10,000, you should never risk losing more than
$100 on any position. The math is fairly self-explanatory, and you will find the basic equation
used below. Once you have a risk percentage in mind, we can move to the next step in
determining an appropriate position size.
Find Your Stop
As with any open position, a stop should be set to determine where a trader wishes to exit a
trade in the event the market moves against them. There are virtually countless ways stops can
be placed. Normally traders will use key lines of support and resistance for order placements.
Traders can use price action, pivots, Fibonacci, or other methods for finding these values. The
idea is with whatever method you decide, count the number of pips from your open price to
your stop order. Keep this value in mind as we move to the last step of the process.

Pip Cost & Lot Size

The last step in determining lot size, is to determine the pip cost for your trade. Pip cost is how
much you will gain, or lose per pip. As your lot size increases, so does your pip cost. Conversely
if you trade a smaller lot size, your profit or loss per pip will decrease as well. Which leaves the
final question, how big should your trade size be?
First, take your total trade risk (1% of your account balance), and then divide that calculated
value out by the number of pips you are risking to your stop order. The total at this point is the
amount per pip you should be risking. In the example above, if you are placing a trade on a
$10,000 account you should only be risking about $100. On a 10 pip stop, this equates to a risk
of $10 a pip. On pairs like the EURUSD, this means trading a 100k lot!

Understanding Lot Sizes & Margin

Requirements when Trading Forex
Historically, currencies were traded in specific amounts called lots. The standard size for a lot is
100,000 units. There are also mini-lots of 10,000 and micro-lots of 1,000.

To take advantage of relatively small moves in the exchange rates of currency, we need to trade
large amounts in order to see any significant profit (or loss).

Lot Number Of Units

Standard 100,000
Mini 10,000
Micro 1,000

As we have already discussed in our previous article, currency movements are measured in pips
and depending on our lot size a pip movement will have a different monetary value.

So looking at an order window below we see that we have chosen to BUY a mini-lot of 10,000
units of the EURUSD.
So what we are effectively doing is buying €10,000 worth of US Dollars at the exchange rate
1.35917. We are looking for the exchange rate to rise (i.e. the Euro to strengthen against the US
Dollar) so we can close out our position for a profit.

So let’s say the exchange rate moves from 1.35917 to 1.36917 –the exchange rate rose by 1c ($).
This is the equivalent of 100 pips.

So with a lot size 10,000, each pip movement is $1.00 profit or loss to us (10,000* 0.0001 =
$1.00).

As it moved upwards by 100 pips we made a profit of $100.

For example’s sake, if we opened a lot size for 100,000 units we would have made a profit of
$1,000.

Therefore lot sizes are crucial in determining how much of a profit (or loss) we make on the
exchange rate movements of currency pairs.

We do not have to restrict ourselves to the historical specific amounts of standard, mini and
micro. We can enter any amount we wish greater than 1,000 units. 1,000 units is the minimum
position size we can open.
So for example, we can sell 28,000 units of the GBPJPY currency pair at the rate of 156.016.
Each pip movement is ¥ 280 (28,000 * 0.01). We then take our ¥ 280 per pip and change it to the
base currency of our account which of course our broker does automatically.

So with a Euro denominated account a fall of 50 pips to 155.516 would mean a profit of 106.00
(50* 2.12).

What is Leverage & Margin?

Trading with leverage allows traders to enter markets that would be otherwise restricted based on
their account size. Leverage allows traders to open positions for more lots, more contracts, more
shares etc. than they would otherwise be able to afford.

Let’s consider our broker a bank that will front us $100,000 to buy or sell a currency pair. To
gain access to these funds they ask us to put down a good faith deposit of say $500 which they
will hold but not necessarily keep. This is what we call our margin. For each position and
instrument we open our broker will specify a required margin indicated as a percentage. Margin
can therefore be considered a form of collateral for the short-term loan we take from our broker
along with the actual instrument itself.

For example, when trading FX pairs the margin may be 0.5% of the position size traded or 200:1
leverage. Other platforms and brokers may only require 0.25% margin or 400:1 leverage.

The margin requirement is always measured in the base currency i.e. the currency on the left of
the FX pair

Let’s look at an example. Say we are using a dollar platform and we wanted to buy a micro lot
(1,000 units) of the EUR/GBP pair and our broker was offering us 200:1 leverage or 0.5%
required margin.

Our broker will therefore take just €5 as margin and we were able to buy 1,000 units of the
EUR/GBP pair. If we were using a US Dollar platform that €5 is automatically converted to
dollars by our broker at the current exchange rate for the EUR/USD.

Trade Type Buy

Instrument EURGBP
Trade Size 1,000 Units
Margin Requirement (Leverage) 0.5% (200:1)
Used margin for Trade €5 (or $6.75 @ EURUSD rate of 1.3500)

Another example:
Say we wanted to sell 50,000 units of the USD/ JPY and we are using a Euro platform and our
broker was offering us 400:1 leverage or 0.25% required margin. Our broker will therefore take
$125 from our balance as our margin requirement and we are able to sell 50,000 units of the
USD/JPY.

This time we are using a Euro platform so that $125 is converted to euro at the current
EUR/USD exchange rate.

Trade Type Sell

Instrument USDJPY
Trade Size 50,000 Units
Margin Requirement (Leverage) 0.25% (400:1)
Used Margin for Trade $125 (or €96 @ EURUSD rate of 1.3000)

Overnight Premiums/Swaps

When an FX position (or a CFD position) is held overnight (or ‘rolled over’) there is a charge
known as a ‘swap’ or ‘overnight premium’. We call it a charge; however it is possible to earn a
positive sum each night too. When trading FX, it is based on the interest rates of the currencies
we are buying and selling.

So for example, if we were buying the AUD/CHF we would earn a positive overnight sum as we
would earn interest on the Australian Dollars we bought as the Australian interest rate is higher
than the Swiss interest rate (in fact the Swiss interest rate is zero). So often buying currencies
against the Swiss Franc will result in a positive swap.

For the most part however an overnight premium will be a charge on our account and again this
relates to the size of our position. The actual percentage is very small each night as it is the
annual interest rate divided by 360 (days in year). Our broker automatically calculates overnight
premiums and they usually take effect after 10pm GMT.

The Formula

Under the trading conditions most brokers will stipulate the swap rates for a buy or sell position
on each pair. We multiply this rate by our trade size and divide by 360 like the formula above to
know what premium we are charged or we earn.

FX Pair Premium Buy (Rate per annum) Premium Sell (Rate per annum)
AUD/CAD +0.8100% -2.1600%
CHF/HUF -3.9060% +2.5060%
EUR/USD -0.6777% -0.5223%
GBP/USD -.2396% -.9605%
AUD/USD +1.7323% -3.0823%

Above are examples of various swap rates for a sample of FX pairs. We can see that the
overnight premium can be positive or negative and depends on whether we are buying or selling
the pair. It is important to review the premiums if we plan to leave positions open overnight as it
will affect the profit or loss of our position. All brokers should outline their overnight rates under

What is a Lot in Forex?

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In the past, spot forex was only traded in specific amounts called lots, or basically the number of
currency units you will buy or sell.

The standard size for a lot is 100,000 units of currency, and now, there are also a mini, micro,
and nano lot sizes that are 10,000, 1,000, and 100 units respectively.

Lot Number of Units

Standard 100,000
Mini 10,000
Micro 1,000
Nano 100
As you may already know, the change in currency value relative to another is measured in
“pips,” which is a very, very small percentage of a unit of currency’s value.

To take advantage of this minute change in value, you need to trade large amounts of a particular
currency in order to see any significant profit or loss.

Let’s assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some
examples to see how it affects the pip value.

1. USD/JPY at an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
2. USD/CHF at an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

1. EUR/USD at an exchange rate of 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 =

$9.99734 rounded up will be $10 per pip
2. GBP/USD at an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 =
9.99416 rounded up will be $10 per pip.
Your broker may have a different convention for calculating pip values relative to lot size but
whichever way they do it, they’ll be able to tell you what the pip value is for the currency you
are trading is at that particular time.

As the market moves, so will the pip value depending on what currency you are currently
trading.

What the heck is leverage?

You are probably wondering how a small investor like yourself can trade such large amounts of
money.

Think of your broker as a bank who basically fronts you $100,000 to buy currencies.

All the bank asks from you is that you give it $1,000 as a good faith deposit, which it will hold
for you but not necessarily keep.

Sounds too good to be true? This is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a trade deposit, also known as “account margin” or “initial
margin.” Once you have deposited your money you will then be able to trade. The broker will
also specify how much they require per position (lot) traded.

For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to
trade a position worth $100,000, but you only have $5,000 in your account.

No problem as your broker would set aside $1,000 as down payment, or the “margin,” and let
you “borrow” the rest.

Of course, any losses or gains will be deducted or added to the remaining cash balance in your
account.
The minimum security (margin) for each lot will vary from broker to broker.

In the example above, the broker required a one percent margin. This means that for every
$100,000 traded, the broker wants $1,000 as a deposit on the position.

How the heck do I calculate profit and loss?

So now that you know how to calculate pip value and leverage, let’s look at how you calculate
your profit or loss.

Let’s buy U.S. dollars and sell Swiss francs.

1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will
be working on the “ASK” price of 1.4530, the rate at which traders are prepared to sell.
2. So you buy 1 standard lot (100,000 units) at 1.4530.
3. A few hours later, the price moves to 1.4550 and you decide to close your trade.
4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you initially bought to open the
trade, to close the trade, you now must sell in order to close the trade so you must take
the “BID” price of 1.4550. The price which traders are prepared to buy at.
5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x
20 pips = $137.40

Bid-Ask Spread

Remember, when you enter or exit a trade, you are subject to the spread in the bid/ask quote.

When you buy a currency, you will use the offer or ASK price.

When you sell, you will use the BID price.

Next up, we’ll give you a roundup of the freshest forex lingos you’ve learned!

Lesson 7: Lot Size and Price Per Pip in Forex!

Lot size refers to the size of the trade you’re making in units of the base currency.

We have standard lot sizes, mini lot sizes, and micro lot sizes.

A standard lot size is 100,000 units of the base currency in a forex trade.

A mini lot size is 10,000 units of the base currency in a forex trade.

A micro lot size is 1,000 units of the base currency in a forex trade.
Once you start trading, you will use a simpler system. A standard lot size is
referred to trading at a volume of 1. That equals $10 per pip.

A mini lot size is referred to trading at a volume of 0.10. That equals $1 per pip.

A micro lot size is referred to trading at a volume of 0.01. That equals $0.10 per
pip.

With advances in technology, most brokers allow you to place trades with custom
lot sizes.

Example 1: If you are trading at a volume of 0.75 you would move the decimal
one place to the right to get the price per pip. The price per pip would be $7.50.

Example 2: If you are trading at a volume of 0.43 you would move the decimal
one place to the right to get the price per pip. The price per pip would be $4.30.

Now you know the basics of lot sizes in forex and how to calculate the price per
pip.

The principles behind lots trading and pips

calculation
Learn Forex Center

What you will learn:

 Lot definition
 Different Lot sizes explained
 USD and EUR practical illustrations
 The correlation between margin and leverage
 Understanding the intrigues in Margin Call calculation

What is a Lot Size in Forex?

In Forex trading, a standard Lot refers to a standard size of a specific financial instrument. It is
one of the prerequisites to get familiar with for Forex starters.

Standard Lots
This is the standard size of one Lot which is 100,000 units. Units referred to the base currency
being traded. When someone trades EUR/USD, the base currency is the EUR and therefore, 1
Lot or 100,000 units worth 100,000 EURs.

Mini Lots
Now, let’s use smaller sizes. Traders use Mini Lots when they wish to trade smaller sizes. For
example, a trader may wish to trade only 10,000 units. So when a trader places a trade of 0.10
Lots or 10,000 base units on GBP/USD, this means that he trades 10,000 British Pounds.

Micro Lots
There are many beginners or small investors who wish to use the smallest possible Lots sizes. In
contrary to the Mini Lots that refer to 10,000 units, traders are welcome to trade 1,000 units or
0.01. For example, when someone trades USD/CHF with a Micro Lot the trader basically trades
1,000 USDs.

Pip Value
Now that we understand what Lots are, let’s take one step further. We need to calculate the Pip
Value so we can estimate our profits or losses from our trading.

The simplest way to calculate the Pip Value is to first use the Standard Lots. You will then have
to adjust your calculations so you can find the Pip Value on Mini Lots, Micro Lots or any other
Lot size you wish to trade.

USD Base Currency

Our calculations in this sector are when your Base currency is the USD. We will provide three
different examples.

USD quote currency of the currency pair. You’re trading 1 standard Lot (100,000 base units) that
the quote currency is the USD such as EUR/USD. The Pip Value is calculated as below:

100,000*0.0001 (4th decimal)=$10

USD base currency of the currency pair. You’re trading 1 standard Lot (100,000 base units) and
the base currency is the USD such as USD/JPY. The Pip Value is calculated as below:

The USD/JPY is traded at 99.735 means that $1=99.73 JPY 100,000*0.01 (the 2nd decimal)
/99.735≈$10.03. We approximated because the exchange rate changes, so does the value of each
pip.
Finding the Pip Value in a currency pair that the USD is not traded. You’re trading 1 standard
Lot (100,000 base units) on GBP/JPY.

The GBP/JPY is traded at 153.320. Because the value changes in the quote currency times the
exchange rate ratio as

The Pip Value => 100,000*0.01JPY*1GBP/153.320JPY = 6.5 GBP

Because the base currency of the account is the USD then we need to take into account the
GBP/USD rate which let’s assume that is currently at 1.53560.

6.5 GBP/(1 GBP/1.53560 USD)= $9.98

EUR Base Currency

Now let’s make our examples when the Base Currency of our account is the EUR

EUR base currency of the currency pair. You’re trading 1 standard Lot (100,000 base units) on
EUR/USD. The Pip Value is calculated as below

The EUR/USD is traded at 1.30610 means that 1 EUR=$1.30 USD so

100,000*0.0001 (4th decimal)/1.30610 ≈7.66 EUR

Finding the Pip Value in a currency pair that the EUR is not traded. You’re trading 1 standard
Lot (100,000 base units) on GBP/JPY. From our example before, we know that the value is 6.5
GBP. Now, we need to take into account the EUR/GBP rate in order to calculate the Pip Value.
Let’s assume that the rate is currently at 0.85000. So:

6.5GBP/(1GBP*0.85 EUR)= (6.5 GBP/1 GBP)/0.85 EUR≈7.65 EUR

Leverage – How it works

You are probably wondering how can I trade with Lot sizes of 100,000 base units or even 1,000
base units. Well, the answer is very simple. This is available to you from the leverage you have
in your account. So let’s assume that your account’s leverage is set at 100:1. This means that for
every $1 used, you’re actually trading $100 in the Forex market. In order for you to trade a
position of $100,000 then the required margin to open such a position will be $1,000. As for any
losses or gains these will be deducted or added to the remaining balance in your account.

If your account’s leverage is set at 200:1 this means that for every $1 you use you’re actually
trading $200. So for a trade of $100,000 you will require a margin to be at $500.

Margin Call – What you should know

Now looking at the examples above regarding the leverage you’re probably thinking that is the
best to work with the highest possible leverage. However, you need to take into consideration
your Margin requirements as well as the risks associated with higher leverages.

Let’s just say that you have deposited first $5,000 to your trading account that the leverage is set
at 100:1. Your nominated currency is the USD. The first time you will login to your MT4 trading
account you will notice that the Balance and the Equity is $5,000 and this is due to the fact that
you did not place any trades yet.

Now, you have decided to open a position on the USD/CHF of the 1 standard Lot which means
that you will require use a margin of $1,000. The floating P/L is at -9.55. The account will show
the following

Balance Equity Margin Free Margin Margin Level

4,990.45 (5,000- 3,990.45 (4,990.45- 499.05%
5,000 1,000
9.55) 1000) (4990.45/1000)*100

If your Forex Broker Margin Call level is set at 100% this means that when the Margin Level
reaches this percentage it will notify you to add more funds. As you can understand from the
example above, the P/L, and your Margin will affect your Margin Level. Now, if your Broker
sets the Stop Out Level at 50% this means that your position will be closed by the Broker when
the Margin Level reaches that level.

Let’s use another example when your leverage is set at 200:1. We will use the same example
above to understand how the leverage will affect your Margin Level. Your account will show the
following

Balance Equity Margin Free Margin Margin Level

5,000 4,990.45 500 4,490.45 998.10%

By looking at the numbers above, you will prefer to use a higher leverage for your account.
However, let’s assume that the market goes against you and you have bought 9 Lots of
USD/CHF but the pair falls. When you open your position you will have the following numbers:

Balance Equity Margin Free Margin Margin Level

5,000 4,990.45 4,500 (900,000/200) 490.45 110.90%

As we explained above, the broker will give you a Margin Call when you have 100% margin
level. This means that you will receive a Margin Call when the USD/CHF falls 5 pips only. On
the other hand, if you had a Leverage set at 100:1 the would not allow you to enter into such a
position from the first place and you would have saved your equity.
Definition of a Lot in Forex
April 28, 2014 by Adam posted in • No Comments

What is a Lot?

A Forex lot is a trading term used to describe the size of a trading

position in Forex with reference to a standard of 100,000 units of the base currency.

The benchmark for forex trades is 100,000 units of the base currency, and since this trade size is
the standard against which other trade sizes are measured, this is referred to as one Standard
Lot.

The Standard Lot is therefore assigned a value of 1.0, and it is equivalent to a position size of
100,000 units of the base currency in which the trader’s account is held. Trade sizes can be a lot
more or a lot less than a standard lot. This is why there are subdivisions of the Standard Lot as
follows:

a) One-tenths of the Standard Lot, known as the Mini Lot. This is equivalent to a position size
of 10,000 units of the base currency of the account, with a minimum lot size of 0.1 lots. Mini lot
measurements therefore start from 0.1 lots to 0.99 lots.

b) One-hundredths of a Standard Lot, known as the Micro Lot. This is equivalent to a position
size of 1,000 units of the base currency of the account, with a lot size of 0.01 lots. Micro lot
measurements start from 0.01 lots to 0.099 lots, or 0.1 mini lots to 0.99 mini lots.

c) Lately, some brokers have come up with position sizes that are even smaller than a micro
lot, and they go by several names. However, these are not standardized and tend to differ from
one broker to another. So we will stick with the standard definitions of the Standard Lot, Mini
Lot and Micro Lot.

All other trade sizes are expressed in multiples of the Standard Lot, or subdivisions of the
Lot/multiples of the Micro Lot or Mini Lot.

The Financial Worth of Forex Lots

Lots in forex are used to assign a measurement to the trade volume of a forex trade position.
Considering that the value of a trade position as well as the movement of the currency pair in
pips is what determines the level of profit or loss after a forex trade, what is the monetary value
of the forex lot? We will assume that the base currency is US Dollars.
a) Standard Lots are worth $10 per pip on currency pairs that do not include the Japanese Yen
This is derived by multiplying the position size of a Standard Lot ($100,000) by 1 pip (0.0001
points). 100,000 X 0.0001 = $10.

b) Mini-lots are worth $1 per pip (10,000 X 0.0001)

c) Micro-lots are worth $0.1 (10 cents) per pip, as 1,000 X 0.0001 = 0.1

All other measurements of the value of a pip can be calculated using these formulae. So a trade
which uses 0.55 lots will be worth 55,000 X 0.0001 = $5.50 per pip.

Why Forex Lots are Important

The value of the forex lot applied to a trade will have a bearing on the risk profile for the
account. The risk to an account is a function of the account size, stop loss, currency traded, risk
percentage applied and the Lot size. This is shown in this demonstration using a forex position
size calculator.

Calculation:

A trader has $2,500 in forex capital, wants to use 3% risk and a stop loss of 50 pips. What lot
size should be use to keep his account from being exposed to too much risk? We refer to a
position size calculator to do the Maths for us:

We can see clearly that the trader can only use a maximum of 15 micro lots (0.15 lots) for this
trade. If the trader intends to take more than one trade, then the lot size must be divided by the
number of trades to come up with a new lot size measurement which will stick to the limits of
risk.

Conclusion

We can see that the forex lot is an integral part of what traders must consider before putting on a
trade. Traders must use lot sizes that conform to acceptable risk limits. Lot sizes will therefore
have to be considered when choosing a broker, when funding the account and definitely before
putting on a trade position.

Broker choice is important as some brokers may only permit certain trade sizes on their platform.
If a trader with $1,000 chooses a platform in which mini lots are the minimum position size that
can be traded, then the account will be highly subject to risk and could suffer a margin call.

Sufficient funds will also be needed to assume certain levels of forex position sizing. From our
calculator, we will see that if the same trader we used in our example had $6,000 to trade, then
higher position sizes could be used.

Understanding the forex lot is key to trading success. Learn it, use it and profit with it.
What is the Spread in Forex?
April 28, 2014 by Adam posted in • No Comments

What is the Spread?

The spread is the difference between the bid price and the ask
price in forex. To understand the spread, certain concepts have to be understood by the trader…

In the offline forex business, we have currency exchangers and Bureau de Change operators who
are available to exchange currencies for business transactions and for travelers. Take for
example, the case of a US citizen wanting to visit a European country. The US Dollar is not
recognized as legal tender for use in a country like Portugal. So a holidaying US tourist will need
to exchange his US Dollars for the legal tender used in Portugal, which is the Euro.

When the exchange is done from US Dollars to Euro, the tourist will be offered a rate. After his
holiday, that tourist will need to exchange the unspent Euros in his possession for US Dollars,
since the Euro is not recognized as the legal tender in the US. This will be done at a rate that will
be different from the original exchange rate. The difference in the exchange rate when
converting from the base currency to the other currency is the spread. Usually, a currency
exchanger will purchase a foreign currency at a lower price, and resell that currency for a higher
price, thus profiting from the difference.

The same principle holds sway in the online spot forex market. All currency pairs are quoted
with 2 prices as shown below:
The price on the left is the bid price, which is the price that the dealer is prepared to buy a
currency from a trader, and the price on the right is the ask price, which is the price that the
dealer is prepared to sell a currency to the trader. So a trader will buy at the ask price, and sell at
the bid price. The difference between the bid price and the ask price is the spread, and is
measured in percentage interest points, or PIPs.

Different Types of Spreads

Spreads are of two types:

a) Fixed

b) Variable

Fixed spreads are a feature of market maker retail platforms such as these forex brokers here. In
this setup, the market maker fixes prices for positions that will be acquired by their retail clients,
and therefore the spreads tend to be fixed irrespective of the conditions in the market.

On the other hand, variable spreads are a feature of Electronic Communication Network (ECN)
platforms in which the order processing mechanism is a straight-through processing (STP)
method. Pricing is obtained from several major liquidity providers and fed straight to the traders
without passing through a dealing desk. This provides a situation where spreads not only differ
from one liquidity provider to another, but actually adjust according to the demand and supply
mechanism at work in the market for the currency pair in question. So it is possible to have a
spread of 3 pips on a currency, and a second later, it climbs to as much as 10 pips. This is seen
especially on news trades that will cause high volatility in the market.

There is no advantage of one spread type over another. It all depends on the choice the trader
makes in choosing a broker type.

Implications of the Spread

What are the implications of the spread and what is the monetary value of the spread?

On the traders’ end, the spread is part of the cost that is incurred in executing trading
transactions. Different currency pairs and assets have different spreads. Generally speaking, the
more liquid a currency pair is, the lower the spread. Liquidity is a function of how many active
traders from all over the world are actively trading the currency pair. Liquid pairs have lower
spreads, but a more limited range of movement. Illiquid pairs tend to have larger spreads and
more range of movement.

On the broker’s side of the equation, the spread is the compensation earned for providing the
forex trading service. In addition, brokers also pay their introducing agents and affiliates from
the spreads of the traders that these agents have recruited into their platform.

Monetary Value of the Spread

The lot size and the number of pips that make up the spread will determine the monetary value of
the spread.

Recall that a standard lot is worth $10 per pip ($100,000 trade value size X 0.0001). Therefore, it
a trader is trading a currency pair with a spread of 4 pips on a standard lot, the monetary value of
the spread is $10 X 4 = $40.

Understanding the monetary value of the spreads for a currency pair will help a trader balance
out risk by using the appropriate trade sizes, or selecting currency pairs with reduced spreads to
save cost.

Issues with the Spread

There are times when spreads may widen unexpectedly, even on platforms that offer fixed
spreads. When there is severe market volatility with lots of traders jostling to get into positions,
some traders may be filled at prices which make the spread a lot wider and more expensive for
the trader. Such an event could occur when there is a high impact news item such as the US Non-
farm Payroll report, or when there is a natural disaster or terrorist attack which causes panic in
the financial markets. Even when pending orders are used, this problem could stil occur.

The only way to prevent this is to use an ECN platform. Usage of an ECN broker will also attract
commissions in addition to the spreads that the trader pays. However, the virtual non-existence
of the slippage phenomenon compensates for the increased charges.
Determining Proper Position Size in Forex Trading
Cory MitchellSep 30, 2014

How big or small your position is should not be a random decision. Position size is precisely
calibrated for the risk on the trade and your personal risk limit. Position sizing can make or break
a trader; too risk adverse and the account won’t grow, take positions that are too large and the
forex market can wipe out an entire account in one big move.

Don’t let this happen to you. Here’s how to determine your personal risk limit and trade risk, as
well as how to come up with the right position size so you capitalize when conditions are
favorable, and won’t lose your shirt if the trade doesn’t work out.

Forex Position Sizing - Step 1

Set a percentage amount of your account you’re willing to risk on each trade. Many professional
traders choose to risk 1%, or less, of their total capital on each trade. If they lose on a trade that
means they have only lost 1%, and still have 99% of their capital intact. In this way, even a string
of losses—and a string of losses will occur to every trader significantly hurt the account.

Risking even less than 1% is common, but some traders will risk up to 2% with a proven system.
If you’re starting out and don’t have a successful track record, stick to risking 1% or less of your
account on each trade.

The limit set on this step applies to all trades.

For example, on a $5,000 trading account, risk no more than $50 (1% of account) on a single
trade. This is your trade risk, and is controlled by the use of a stop loss.

See also Do You Know Your Trading Order Types? A Foolproof Guide

Forex Position Sizing - Step 2

Establish where the stop loss will be for this particular trade; measure the distance in pips
between it and your entry price. This is how many pips you have at risk. Based on this
information, and the account risk limit from step 1, the ideal position size can be calculated.

The stop loss is placed based on a strategy. Find the ideal spot for the stop loss, and then
calculate the position size. Don’t pick your position size first, and then place a stop loss to
accommodate it.

Assume a $5,000 account and a risk limit of $50 on each trade (1% of account). You buy the
EUR/USD at 1.3600 and a place a stop loss at 1.3550. The risk on this trade is 50 pips.

Be sure to also read Which Position Sizing Strategy Is for You? Equal Risk vs. Equal Dollar

We now know the risk on the trade is 50 pips, and we can risk $50. It’s now time to determine
the ideal position size.

Forex Position Sizing - Step 3

Determine position size based on account risk and trade risk.

Since it’s possible to trade in different lots sizes, be aware of which you are using. A 1000 lot
(micro) is worth $0.1 per pip movement, a 10,000 lot (mini) is worth $1, and a 100,000 lot
(standard) is worth $10 per pip movement. This applies to all pairs where the USD is listed
second, for example the EUR/USD. If the USD is not listed second then these pip values will
vary slightly.

If the price moves from 1.3600 to 1.3601 that is a pip movement, and will result in making
$0.10, $1 or $10 based on the lot size taken. Traders can use various combinations of these lot
sizes, and trade multiple lots.

To find your exact position size, use the following formula: [Account risk/(trade risk x pip
value)] = position size in lots

Assuming the 50 pip stop in the EUR/USD, the position is: [$50/(50x$0.1)] = $50/$5 = 10 micro
lots. The position size is in micro lots because the pip value used in the calculation was for a
micro lot.

For the number of mini lots use $1 instead of $0.1 in the calculation, to get 1 mini lot
[$50/(50x$1)] = $50/$5 = 1 mini lot.

The pips at risk will often vary from trade to trade, so your next trade may only have a 20 pip
stop. Use the same formula: [$50/(20x$1)] = $50/$20 = 2.5 mini lots, or 25 micro lots.

Figure 1 shows another example of this, using a trade example on a chart.

Figure 1. Determining Position Size on AUD/USD 1 Hour Chart - Source: MetaTrader

As account capital fluctuates up and down, so will the dollar amount of the account risk. For
example, if the account increases to $6,000, then risk $60 on each trade. If the account value
drops to $4,500, only risk $45 on each trade.

See also 4 Ways to Exit a Losing Trade

Pip Value

When the USD is listed second in a currency pair, the pip value is fixed, as discussed above.
However, when the USD is listed first, the pip value will vary based on the current price of the
pair.

To find the pip value of a pair where the USD is listed first, divide the normal pip value
(discussed above) by the price of the forex pair.

For example, to find the pip value of a USD/CHF micro lot, divide $0.10 by the current
USD/CHF price. If the current rate is 0.9325, then the pip value is $0.10/0.9325 = $0.107.
For the USD/JPY follow the above procedure, but then multiply by 100 to get the proper pip
value. Here’s an example using a standard lot: $10/107.151 = $9.33; this how much each pip
movement will cost if you have a one standard lot position.

The Bottom Line

Risk too much on each trade, and you can blow out your account … quickly. Risk too little and
your account won’t grow. By risking about 1% of your account each trade, risk is managed, so
even a string of losses won’t significantly hurt the account. If you make more on your winners,
say 3% to 5%, than you lose on your losses, the account can still grow quite quickly.

Set the percentage you’re willing to risk, and don’t change it. On each trade establish where you
will place your stop loss, determine the pip value if needed, and then calculate the ideal position
based all this information.

The ideal position makes sure you are trading in alignment with your plan. You’re not risking
too much, or too little, but rather taking on nearly the same amount of risk on each trade. After
all, in advance we don’t know which trades will be profitable and which ones won’t. This is why
we take a similar position size on all trades.

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What Does a Spread Tell Traders?

Jan 10, 2014 7:00 am +03:00

by Walker England
Talking Points

 Spreads are based off the Buy and Sell price of a currency pair.
 Costs are based off of spreads and lot size.
 Spreads are variable and should be referenced from your trading software.

Every market has a spread and so does Forex. It is imperative that new Forex traders become
familiar with spreads as this is the primary cost of trading between currencies.

Today we will review the basics of reading a spread and what the spread tells us in regards to the
costs of our transaction.

Spreads and Forex

Every market has a spread and so does Forex. A spread is simply defined as the price difference
between where a trader may purchase or sell an underlying asset. Traders that are familiar with
equities will synonymously call this the Bid: Ask spread.

Below we can see an example of the spread being calculated for the EURUSD. First we will find
the buy price at 1.35640 and then subtract the sell price of 1.35626. What we are left with after
this process is a reading of .00014. Traders should remember that the pip value is then identified
on the EURUSD as the 4th digit after the decimal, making the final spread calculated as 1.4 pips.

Now we know how to calculate the spread in pips, let’s look at the actual cost incurred by
traders.
Spreads Costs and Calculations

Since the spread is just a number, we now need to know how to relate the spread into Dollars and
Cents. The good news is if you can find the spread, finding this figure is very mathematically
straight forward once you have identified pip cost and the number of lots you are trading.

Using the quotes above, we know we can currently buy the EURUSD at 1.3564 and close the
transaction at a sell price of 1.35474.That means as soon as our trade is open, a trader would
incur 1.4 pips of spread. To find the total cost, we will now need to multiply this value by pip
cost while considering the total amount of lots traded. When trading a 10k EURUSD lot with a
$1 pip cost, you would incur a total cost of $1.40 on this transaction.

Remember, pip cost is exponential. This means you will need to multiply this value based off of
the number of lots you are trading. As the size of your positions increase, so will the cost
incurred from the spread.
Changes in the Spread

It is important to remember that spreads are variable meaning they will not always remain the
same and will change sporadically. These changes are based off of liquidity, which may differ
based off of market conditions and upcoming economic data. To reference current spread rates,
always reference your trading platform.