Volume

Razvan Mihai

Analyst

 

This is another important element a trader should know, not only the definition but its use in a trading strategy. Volume is the amount of money a trader intends to use when entering a trade. It is imperative to open a trade with the correct amount. If the amount is too large and multiplied by the leverage, this may result in a loss that could wipe the account.

Let us examine the previous example. You have 1000 Euro to invest in your trading account. You then decide to enter a trade with a full balance of 1000 Euro, adding the 1:100 leverage given by the brokerage house, you will essentially be in the market with 100.000 Euro. The price of EURUSD is 1.1100, therefore you sell your Euros to buy US Dollars, with the assumption of making a gain. Instead the price increases to 1.1150. In this case you would incur a loss of 500 dollars. This amount is 50% of your entire balance.

In this scenario, even though the profit could be 50%, the loss could also be 50%. Unless you are equipped to take high risks, you should re-adjust your trading amount and pursue smaller investments such as 500 Euro, 200 Euro or even 100 Euro. With these volume levels the profits may be smaller as well as the losses in case of poor decision making.

In Forex industry has few brokerage houses offering the flexibility to trade specific amounts, such as 120 Euro or 1540 US Dollars or 3450 British Pounds. Forex traders use a definitive term considered to be a standard volume.

This standard volume is called LOT. One LOT has a nominal value of 100.000 units from the first currency of the pair.

 

1 Lot of EURUSD = 100.000 EURO

1 Lot of USDJPY = 100.000 USD, more examples follow.

 

When entering positions, most Forex traders prefer to select their volume using the following measuring unit. It is not mandatory to constantly trade 1 lot. A trader can choose from micro lots to tens of lots. The following scale should provide more clarity:


Micro Lot               Mini Lot                 Lot             

0.01 Lots                0.1 Lots                1

1000       10.000          100.000

 

2 Lots                     5 Lots                     10 Lots      

200.000               500.000               1.000.000

 

10 Micro Lots = 1 Mini Lot

10 Mini Lots = 1 Lot

 

Nowadays brokerage houses offer traders the opportunity to open trades with values varying from one micro lot to 50 or 100 lots.


These examples apply only for Forex trading. Other markets like commodities and indices have a different way of calculating the nominal value of a 1 lot.


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