What is trading?
FOUNDATIONS: COURSE 1 | LESSON 2
Lots and position sizes
Learning objectives
By the end you can convert between lots, units and real currency exposure for any position.
By the end you can compute what a given lot size means in $-per-pip and in risk on a specific trade.
By the end you can choose a position size by working backwards from the money you're willing to lose.
Last lesson gave you the pip — the market's unit of movement. This lesson gives you the lot — the unit of size. Together they answer the only question that matters before any trade: "if I'm wrong, what does it cost?" Most blown accounts didn't fail at prediction. They failed right here, at sizing.
Lots, unpacked
Currencies trade in standardised bundles called lots:
| Name | Lots | Units of base currency |
EUR/USD exposure at 1.0850 |
Pip value (USD-quoted pairs) |
|---|---|---|---|---|
| Standard | 1.00 | 100,000 | ~$108,500 | $10.00 |
| Mini | 0.10 | 10,000 | ~$10,850 | $1.00 |
| Micro | 0.01 | 1,000 | ~$1,085 | $0.10 |
Three things to notice.
First, a lot counts base currency. One lot of EUR/USD is 100,000 euros; its dollar exposure depends on the current price (100,000 × 1.0850 ≈ $108,500).
Second, lot sizes are fractional and continuous on modern platforms: 0.07, 0.23, 1.40 are all valid. This matters enormously, because precise sizing (coming below) usually lands on "untidy" numbers. Traders who only ever click 0.1 / 0.5 / 1.0 are rounding their risk, sometimes by 50%.
Third, look at that exposure column and let it sink in: a "standard" lot is a six-figure position. The naming is a leftover from interbank trading, not a suggestion that 1.00 is a normal beginner size. For a $1,000 account, it emphatically is not — a single standard lot means every pip is 1% of your account.
From lots to consequences
Lot size is an abstraction until you chain it to money. The chain has three links:
Lots → pip value → risk.
Example. You're considering shorting GBP/USD at 1.2700 with a stop-loss at 1.2760 (60 pips away — we'll cover the order itself in F1.4, but the concept is simple: the trade auto-closes there if you're wrong).
- At 1.00 lot: pip value $10 → risk = 60 × $10 = $600.
- At 0.10 lots: pip value $1 → risk = 60 × $1 = $60.
- At 0.01 lots: pip value $0.10 → risk = 60 × $0.10 = $6.
Identical trade idea, identical entry, identical stop. The only difference is the lot size, and the outcome ranges from "a coffee" to "a month's groceries". When traders say "position sizing is risk management", this table is what they mean.
Note what lot size does not change: the probability of the trade working, the pips gained or lost, the quality of the analysis. It's purely a volume knob — the same one leverage turned in D1.5, seen from the practical end.
Sizing backwards: the professional habit
Amateurs pick a lot size that "feels normal", then discover their risk. Professionals decide the risk, then derive the size. The formula:
Position size (lots) = money at risk ÷ (stop distance in pips × pip value per lot)
Worked example, the way you'll actually do it:
- Account: $2,000. You've decided (F2.3 will formalise this) to risk 1% per trade → $20.
- Trade idea: long EUR/USD at 1.0850, stop at 1.0805 → 45 pips of stop distance.
- Size = $20 ÷ (45 × $10) = 0.044 → 0.04 lots (round down; rounding up increases risk beyond your limit).
- Check: 0.04 lots = $0.40/pip; 45 pips × $0.40 = $18 risked. ✓ Under budget.
Run the same account and risk budget with a tighter 20-pip stop and you get $20 ÷ (20 × $10) = 0.10 lots. See what happened? Tighter stop → bigger allowable size; wider stop → smaller size. Your risk in money stays constant at $20 while stop distance and lot size trade off against each other. That's the mechanism that lets you take a 150-pip swing trade and a 25-pip intraday trade with the exact same account risk — something no fixed-lot-size habit can do.
This is also your defence against the most seductive bad idea in trading: "the setup looks really good, so I'll size up". Confidence is not collateral. The formula doesn't have an input for excitement, and neither should you.
Common sizing mistakes (a field guide)
- The fixed-lots trader. Always 0.1 lots, whatever the stop distance. A 20-pip stop risks $20; an 80-pip stop risks $80 — 4× the risk while feeling like "the same size".
- The rounding-up optimist. The formula says 0.044, they trade 0.05 — "it's basically the same". It's 14% more risk, on every trade, forever.
- The martingale recoverer. Doubling size after losses to "win it back". Two doublings after $20-risk losses means risking $80 to recover $60, and one more loss digs a $140 hole. This is how small drawdowns become account funerals.
- The cross-pair copier. Using EUR/USD sizing on USD/JPY or gold, forgetting pip/point values differ per instrument. Always compute per instrument — or use the position size calculator in our tools suite, which exists precisely so this arithmetic never blocks a decision.
One practical note for platform inputs: MT4/MT5 order tickets ask for volume in lots. Some other platforms ask for units or exposure. Same reality, different units — always confirm what the field means before your first trade on any new platform. (Sound familiar? Same rule as pips vs points.)
Key takeaways
1 lot = 100,000 units of base currency; mini = 0.1, micro = 0.01 — and fractional sizes like 0.04 are normal and correct.
Lot size is a pure volume knob: it changes the money outcome of a trade, never the odds.
Risk = stop distance (pips) × pip value (from lot size). Decide the risk first, then derive the size.
Size = risk ÷ (stop pips × pip value per lot), rounded down — tighter stops allow bigger size at the same money risk.
Fixed lot sizes, rounding up, doubling after losses, and copying sizes across instruments are the four classic sizing errors.