While practicing trading in the forex market, you may come across the term Forex lot size. Do you exactly know what does that term mean? How is a lot size chosen in the forex market? Well, if you have just started as a newbie in the forex market, you may not be aware of all these term unless you take up a forex trading course. However, lot size plays a pivotal role in the forex market which every trader should be aware of. So, here, in this article, you will come to know about some important facts about forex lots size and how they prove useful in trading.
Why should one learn about forex lot size?
Understanding forex lots size is very important as this will help you to avoid major pitfalls associated with forex market. As it is already mentioned that forex is a highly volatile market, it involves the use of leverage with which you can maximize your profit with a small amount of investment. But before you finally dive into using forex leverage account, you should understand how leverage works with different forex lot sizes and what is the optimum lot size in the forex trading?
So here, we start with different types of Forex lot size and how they prove useful in the trading business.
Different forex lot sizes
The normal lot size is mostly used by beginners to start a new forex account. This lot size starts with $10,000. Most of the newbie traders are asked to open up their trading account with a minimum $10,000 balance and the leverage ratio stands here at 100:1. This means you will get a loan from the broker of $100,000 for $1000. Let’s cite a brief example here for a better understanding.
For example, when you set leverage ratio of 100:1 on your trading account, then you will gain a profit of $10 for every pip, here the leverage involves in the form of two-way lane. The trader must acquire proper information on leverage with a normal lot size before he or she starts practicing trading in the forex market.
Now it’s time to talk about mini forex lot size and how does it work effectively with leverage. Most of the traders choose 1 mini lot in order to start trading in the forex market. The leverage ratio with mini lot stands at 40:1.
To define this aspect in simple terms, let’s cite an example here. For $10,000 trading account balance, the leverage ratio will be 1:10 of standard forex. Thus, for 1 pip of forex, you will earn a profit of $1. In the same way, for every 1 pip value, the market will lose $1.
After mini lots, it’s time to talk about micro lots. Most brokers allow traders to choose micro or smaller lots in 1:4 leverage ratio, i.e. $250 x 4 =$1000. This means for 1 pip in the forex market; you will earn 10 cents profit, and the same amount will be lost by the forex trader.
Hope, this above mentioned information proves useful for you to learn about different forex lot sizes. Now, you can start trading with a minimum lot.
Wish you a happy trading.