So, you want to be a Forex trader, but you’re not sure how much to buy and sell when you take a trade. First, you’ll need to understand the concept of “lots”.

Believe me when I say, it can take hours to get to grips with this concept and what the ideal amount to buy or sell is when it comes to Forex…

That’s why today, I thought I’d share my smartie example as a simple way to explain lots.

By the end of this article, you’ll know exactly what a lot size is, what the best lot size to take per trade and how you can start trading….

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:

Lots

As you know there are two currencies required to make up a currency pair.

Take the United States Dollar versus the South African rand (USD/ZAR) for example.

As I type this, it’s trading at R18.95.

This means, when I exchange one US dollar, I’ll receive R18.95.

Or if I want US dollars, I will give them R18.95, and I’ll get one US dollar.

The same goes with trading Forex.

When we buy a USD/ZAR currency pair, you’ll buy 1 unit of the United States dollar and be exposed to R18.95.

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 one micro lot.

One Micro lot is equal to 1,000 units of the base (first) currency pair.

In this case, it is the US dollar.

If you buy one micro lot of the USD/ZAR this means you’ll buy 1,000 US dollars and be exposed to R18,950 (1,000 units X R18.95).

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.

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:

Currency: USD/ZAR
Action: Buy (go long)
Entry: 18.95
Stop loss: 18.00
Take profit: 20.40

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)
= (R18.9500 – R18.00)
= 0.9500

This means, we’re willing to risk 9,500 pips (10,000 X 0.95) in our trade…

Step #2: Rands risked per micro lot

If you remember in the table, the rands risked per pip (pip value) is R0.10.

This means, every one pip that moves against or for you, you’ll lose or make 10 cents.

And we know that we’re willing to risk 9,500 pips in this trade (step 1).

This means our rands risked per micro lot is R950. (9,500 pips X R0.10)

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 (2% of R50,000 portfolio).

Rands risked per micro lot = R950

Now we simply divide the two and we’ll get our answer…

Number of micro lots =

= (Rands risked per trade ÷ Rands risked per micro lot
= (R1,000 ÷ R950)
= 1.05

So, in your platform, you’ll simply type in 1.05 and that’s how many micro lots you’ll need to trade to risk 2% of your R50,000.

Now you know how to calculate the micro lot size when you trade Forex.

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