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What lot size has to do with a box of smarties…
When you buy a snack size box, you’ll always find around 10 smarties inside.
And if you buy a 50g box, you’ll find 56 individual smarties inside.
Hence the slogan “Whatalotigot”.
Well the same goes with when you buy a currency pair.
With Forex, you’ll also buy what’s known as a ‘lot’.
A ‘lot’ is basically a fixed contract of a specific amount of units, you’ll buy or sell when you trade Forex.
You get different ‘lot sizes’ like you do with a box of smarties.
Take a look at the below table to see…
As you know there are two currencies, in order to make up a currency pair.
Take the South African rand (USD/ZAR) for example.
Right now, it’s trading at R16.60.
This means, when I exchange one US dollar I’ll receive R16.60.
The same goes with trading Forex.
When we buy a USD/ZAR currency pair, you’ll buy 1 unit of the USD/ZAR and be exposed to R16.60.
However, with Forex trading we can’t just buy 1 unit of the USD/ZAR, we’ll need to buy a bunch of them – hence “lots”.
And so the minimum units you can buy (for most brokers) is 1 micro-lot. 1 Micro lots is equal to 1,000 units of the base currency - which in this case is the US dollar.
If you buy 1 micro-lot of the USD/ZAR this means you’ll buy 1,000 US dollars and be exposed to R16,600 (1,000 X R16.60).
NOTE: I always recommend starting off with a small lot size (like micro-lots), to manage our risk better with each trade we take.
So what is the best lot size when taking a Forex trade?
Well first, this depends entirely on your portfolio value.
And second, it depends on how much of your portfolio you’re willing to risk per trade.
So let’s use a recent example from Pickpocket Trader where Trader X banked his members a 243.90% gain from the USD/ZAR.
Here’s how to choose your best lot size with a Forex trade
Let’s say you have a R50,000 portfolio and you only want to risk a maximum of 2% (R,1000) in your trade.
Here are the trade specifics:
Action: Buy (go long)
Stop loss: R15.50
Take profit: 16.80
With this information we can now, calculate the number of micro-lots you would have bought in your Forex trade.
3 Steps to calculate the number of micro-lots using
the 2% rule
Step #1: Calculate the loss in pips
First, we have to found out how many pips we are willing to risk between the entry and stop loss price levels…
Loss in pips = (Entry – Stop loss)
= (R16.4000 – R15.5000)
This means, we’re willing to risk 9,000 pips (10,000 X 0.9000) in our trade…
Step #2: Rands risked per micro-lot
If you remember in the table, the rands risked per pip (pip value) is R0.01.
This means, every one pip that moves against or for you, you’ll lose or make 1 cent.
And we know that we’re willing to risk 9,000 pips in this trade (step 1).
This means our rands risked per micro-lot is R90. (9,000 pips X R0.01)
Step #3: Calculate the number of micro-lots
Finally, we have the two values we need to calculate the number of micro-lots to buy.
Rands risked per trade = R1,000.
Rands risked per micro lot = R90
Now we simply divide the two and we’ll get our answer…
Number of micro-lots
= (Rands risked per trade ÷ Rands risker per micro lot
= (R1,000 ÷ R90)
This means, we would have bought 11 micro-lots in this USD/ZAR trade in order to risk 2% of our portfolio and bank a 243.9% gain (based on the initial deposit)…
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How to find the best forex trade ideas to profit from
Now that you know how to calculate the best lot size with Forex, you’re ready to tackle the Forex market.
Trader X has more Forex profit opportunities lining up and could come any day now.
In fact, on top of the 243.9% gain, Trader X also banked his members a 28.93% from the CAD/CHF just the other day… And he’s just getting started.
Analyst, Red Hot Storm Trader