Understanding the meaning of the Lot unit and the correct calculation for traders

If you’re a beginner just starting to trade Forex, you might wonder what a lot is and why it’s an important part of trading decisions. The truth is, choosing the right lot size isn’t about making profits; it’s about survival in the market. Many new traders make mistakes by randomly selecting lot sizes—some always trade 0.01 lots because they’re afraid, others trade 1.0 lots hoping to get rich quickly. But neither approach is professional. Today, we’ll reveal the secret: what is a lot, and how to calculate it correctly according to international standards.

Basics You Need to Know: Why Does Forex Use Lots?

To understand more deeply why a lot is a crucial tool in the Forex market, let’s look back at the issues in the market.

In Forex, we don’t buy actual currencies but exchange rates. Price movements are very small, called “Pip” (Percentage in Point). Generally, 1 Pip equals 0.0001. For example, EUR/USD moves from 1.0850 to 1.0851—that’s just 1 Pip, worth only $0.0001.

Imagine trading 1 Euro at a time. Even if the price moves 100 Pips, you only make $0.01. Small trades like this are practically unfeasible.

To solve this, Forex brokers created a standard measurement unit called a lot. The purpose is to aggregate small trades into a larger unit that can generate meaningful profits or losses. Think of it like buying eggs—you can’t buy just one egg at the market; you buy a dozen (a lot).

What Does a Lot Mean Exactly?

Source: Mitrade

A lot is a unit of contract size indicating how much of the asset you are buying or selling. According to international standards accepted in financial markets, 1 Standard Lot equals 100,000 units of the base currency.

Beginners often get confused—“base currency” is the currency that appears first in the currency pair.

Examples for clarity:

• EUR/USD at 1 Lot: You control 100,000 Euros (EUR), not dollars.
• USD/JPY at 1 Lot: You control 100,000 US Dollars (USD).
• GBP/USD at 1 Lot: You control 100,000 British Pounds (GBP).

Understanding that 1 Lot equals 100,000 units of the first currency is key to calculating risk correctly.

How Many Types of Lots Are There, and Who Are They For?

Source: Mitrade

Since 1 Standard Lot is huge—100,000 units—requiring significant capital, the market has subdivided lots into smaller sizes to accommodate traders with different funds. Since 2022, reputable brokers in Thailand and globally have mainly offered four lot types:

1. Standard Lot

• Size: 1.0
• Units: 100,000
• Value per Pip (EUR/USD): about $10
• Suitable for: Professional traders, institutional funds, high-capital investors only

2. Mini Lot

• Size: 0.1
• Units: 10,000
• Value per Pip (EUR/USD): about $1
• Suitable for: Intermediate traders with some market understanding and capital

3. Micro Lot

• Size: 0.01
• Units: 1,000
• Value per Pip (EUR/USD): about $0.10
• Suitable for: All beginners; recommended for starting real trading

4. Nano Lot

• Size: 0.001
• Units: 100
• Value per Pip (EUR/USD): about $0.01
• Suitable for: Learning basics; similar to demo trading but with real money in very small amounts

Currently, most international brokers, including Mitrade, prefer Micro Lots (0.01) as the starting size because they offer flexibility and a real trading experience. The 0.01 lot still provides psychological pressure and learning value, whereas Nano Lots might be too low-risk to learn much.

Comparison Table of the 4 Lot Types

How Lot Size Affects Your Portfolio: A Real Perspective

This is the core point—lot size determines the value per Pip. The larger your lot, the more a small price change impacts your account. Think of lot size as the accelerator pedal: pressing fully (trading large lots) makes you go fast—both in profit and loss.

From the previous table, key figures for most USD pairs:

• 1.0 Standard Lot: 1 Pip movement = $10 profit/loss
• 0.1 Mini Lot: 1 Pip = $1
• 0.01 Micro Lot: 1 Pip = $0.10

Case Study: Different Outcomes Based on Lot Size

Imagine two traders, Trader A (aggressive) and Trader B (cautious), both start with $1,000. They both believe EUR/USD will rise and set the same TP and SL at 50 Pips.

Different lot choices:

• Trader A: Buys 1.0 Standard Lot ($10 per Pip)
• Trader B: Buys 0.01 Micro Lot ($0.10 per Pip)

If EUR/USD rises 50 Pips (correct prediction):

• Trader A: 50 × $10 = +$500 (balance now $1,500)
• Trader B: 50 × $0.10 = +$5 (balance now $1,005)

If EUR/USD falls 50 Pips (wrong prediction):

• Trader A: 50 × $10 = -$500 (balance now $500)
• Trader B: 50 × $0.10 = -$5 (balance now $995)

The key takeaway:

When Trader A loses $500, his account drops to $500—50% loss. One more such loss and his account is wiped out. Trader B loses only $5, remaining at $995—less than 1% loss. He can withstand many more losing trades before risking total wipeout.

This illustrates overtrading—using too large a lot size—leading to rapid account depletion. No matter how good your strategy, big lot sizes increase risk exponentially.

Main lesson: Lot size is about risk management, not profit.

How to Calculate a Safe Lot: Formulas and Real Examples

Once you understand that random lot sizes are dangerous, the next question is: “How do I calculate the right lot size?”

Professional traders never guess—they always calculate. The goal is to set a fixed risk per trade, e.g., “I will not lose more than 2% of my capital on any trade,” regardless of SL width.

Three Key Data Points Needed Before Calculation

Before applying any formula, you need a trading plan and financial plan, which include these variables:

1. Account Equity: Total funds in your trading account (e.g., $5,000)
2. Risk Percentage: How much of your capital you’re willing to risk per trade (e.g., 1-3%)
3. Stop Loss (SL): Your planned SL in Pips (e.g., 50 Pips)

The Standard Formula Used Worldwide

Lot Size = (Account Equity × Risk Percentage) ÷ (Stop Loss in Pips × Pip Value)

This formula might look complex, but it essentially ensures you risk only a fixed amount per trade.

Example 1: Calculating Lot for EUR/USD

Scenario:

• Account Equity: $10,000
• Risk per trade: 2% = $200
• Stop Loss: 50 Pips
• Pip value for 1 Lot: $10

Calculation:

• Lot Size = $200 ÷ (50 Pips × $10)
• Lot Size = $200 ÷ $500
• Lot Size = 0.4 lots

Result: You should trade 0.4 lots to risk exactly $200 if SL hits at 50 Pips.

Example 2: Calculating Lot for Gold (XAUUSD)

Gold trading involves different pip values.

Understanding Gold Points:

• In Forex, 1 Pip = 0.0001
• In Gold, prices are around 4,000, so we often refer to “Points” (not Pips)
• 1 Standard Lot of Gold = 100 ounces
• Price movement of $1 per ounce = $100 per lot
• 1 Point (0.01) in Gold roughly equals $1

Scenario:

• Account Equity: $5,000
• Risk: 2% = $100
• SL: $50 (e.g., from 4,050 to 4,000)
• Point value per lot: $1

Calculation:

• Lot Size = $100 ÷ (50 Points × $1)
• Lot Size = $100 ÷ $50
• Lot Size = 2 lots

Result: You should trade 2 lots of gold to risk $100 with a 50-point SL.

Beware! Lot Sizes Vary Across Markets—Cross-Market Risks

A common mistake is assuming lot sizes are the same across different markets. For example, a 0.1 lot in Forex is not equivalent to 0.1 lot in gold or oil.

The actual contract sizes differ:

• EUR/USD: 1 lot = 100,000 EUR
• Gold (XAUUSD): 1 lot = 100 ounces
• Oil (WTI): 1 lot = 1,000 barrels
• Indices: Vary depending on broker, often 1 or 10 contracts

The risk and value per lot are different, so always check the specific contract size for each instrument.

Market Contract Size Comparison Table

Summary: Why Is Lot Important?

Lot isn’t just a number you type; it’s a risk management tool. Choosing the correct lot size is more crucial than finding the perfect entry point because it determines whether you survive long-term or blow up your account.

Change your mindset:

• Instead of asking, “How many lots should I trade to get rich fast?”
• Ask, “If I make a wrong move, how much lot can I trade so I don’t wipe out my account and can keep trading?”

By asking the right questions, you move from a beginner to a professional trader.