Lot Sizing



-Forex Trading - beginner's Perspective-
LOT SIZES:
As mentioned in Forex Trading Intro., the change in currency value relative to another is in a pair, is measured in “pips”. And a PIP indicates (very small) percentage change in price for a pair.

Due to this 'very small change' in price as indicated by PIPs, that trades are taken in Lot sizes (Lots).

Lots come in different sizes, and are allocated as follows: -
-Full (standard) Lot = 100,000 Units (1.0)
-Mini Lot = 10,000 Units (0.1).
-Micro Lot = 1,000 Units (0.01)

For Instance:
To calculate the value of a PIP given a “GBPUSD” pair, would be done as follows: -

As we are aware, a price increase of 0.0001 (in a US$ based pair) is equal to 1 PIP.


Say we trade a mini lot of 10,000 units and assume that the GBPUSD exchange rate is 1.2940.

Here is how we can calculate value of a PIP: -
Formula: (1 PIP in decimal places * trade size) / Exchange rate = Value per PIP.
0.0001*10,000=1
1/1.2940=0.77279.

Therefore each PIP = 0.773 GBP.

*Say you entered a trade with the following data:
-GBPUSD (quote) = 1.2940.
-Mini lot = 10,000.

Take Profit = after 40 PIPS (1.2980).
 *You would calculate your profit as follows: -
0.773*40 = 30.92 GBP

In other words, if you placed a buy (long trade) on GBPUSD with a mini lot at 1.2940 and took profit at 1.2980 (i.e. 40 PIPS), you would have made a profit of 30.92 GBP on that trade.

If you placed a buy (long) trade on GBPUSD with a mini lot (0.1) at 1.2940 and took profit at 1.2980, you would have made 40 Pips profit. Multiply that by the value per Pip and you have the profit in GBP:
  • 40 = 92 GBP
Lot sizing will be discussed in more details in the near future.

NB: In Forex trading,
  • Going “Long” means Buying.
  • Going “Short” means Selling.
OJ Mwale - Sani Global
Further help on the Forex Trading:
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