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27.How to interpret the contract size in FX trading?

November 11, 2020 21:59 PM

In this article, we will discuss the contract size in forex: its meaning, how to calculate it, and the standard size options.

Introduction

With the rapid development of global technology, investment has become more familiar. The Forex market is one of the most famous ways of investing.

Forex accounts offer various advantages for investors of different categories. It has become even more popular since the rollout of online trading platforms.
 
The years after 2000 were the era of the rapid growth of retail investor accounts. As a result, the threshold for investment has been lowered over the years. It is now easier for small investors to take part in the forex market, the largest financial market in the world.

What is a contract size in forex?

The forex contracts of the standard lot come with a size of 100,000 units. Yet, it is different when it comes to profit and loss calculation.
Say, an investor long’s one standard lot of EUR/USD and one standard lot of AUD/USD, providing that both prices increase 1% afterward.
 
Assume investor opens the position of EUR/USD at 1.19 and sells at 1.2019 (1.19*101%). The P&L is: (1.2019-1.1900)* 100,000 = 1,190 USD.
 
Assume investor opens the position of AUD/USD at 0.7 and sells at 0.707 (0.7*101%). The P&L is: (0.707-0.7)* 100,000= 700 USD.
 
The difference in P&L is caused by different based currency holding, 100,000 EUR contract, and 100,000 AUD contract. The total contract value in EUR/USD is more significant. Thus, the P&L is different if we assume the same move percentage for the above case.
 
But, when EUR or AUD appreciates, the total contract value of the related floating position also changes (USD). If a broker sets a margin need with a fixed leverage ratio, investors must maintain more margin in the trading account.
 
Furthermore, if we trade with different contract sizes, the pip value will be varied as well.

What are Standard lot, Mini lot, and Micro lot? 

A Lot is the measurement unit for the size of forex trading contracts. In the forex market, the often-heard terms are a standard lot (100,000 units), mini lot (10,000 units), and micro lot (1,000 units).
In earlier years, the usual lot used to be the smallest lot size for investors to take part in forex.
 
 As a result of the constant stream of small investors, forex has gained popularity from 2008 to 2009.
 
Since then, trading in mini and micro-lots has become commonplace in retail investor accounts.
 
When talking about one lot of a contract, the lot size refers to the standard lot. The “volume” (trading lot size) of “1” set on the brokers’ platform is set to 1 standard lot as default. Thus, 0.1 lot is equal to 1 mini lot, and 0.01 lot is equal to one micro lot.
 
For the other trading products, it is also adjusted with the ratio of 1/10. Keep in mind that different units with separate contracts measure different products.
 
For example, a standard lot of gold refers to 100 ounces, while a standard lot of crude oil refers to 1,000 barrels.
 
Let’s take forex as an example. A standard lot of EUR/USD refers to a 100,000 EUR contract, and a mini lot of GBP/USD refers to a 10,000 GBP contract.
It is noteworthy that different brokers may define and name their contract size. Some brokers may set 10,000 units as one standard for forex products on their platforms, which might confuse some investors.
When it comes to specific stocks and index products in CFD, it is common to see that contract size are varied.
So, investors should consult the brokers first to know more about the specifications before trading.

The difference in FX futures specifications

Contracts of FX futures are different from the Spot forex mentioned above. According to the Chicago Mercantile Exchange (CME) specifications, one standard lot of GBP contracts is 62,500 GBP.
 
 
One standard lot of JPY refers to 12,500,000 JPY, one standard lot of EUR refers to 125,000 EUR, and one standard lot of CAD refers to 100,000 CAD.
 
 
Since the contract size and the base currency of these products differ from spot trading, the P&L calculation for each pip needs to be adjusted.

Next Article: 28. What are stop loss and take profit?

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What s the Contract Size in FX Trading? | ZFX

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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.

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