Contract sizes are standardized among various asset types. Which makes calculations easier.
Contract Size definition
In financial markets the term Contract Size refers to the amount of deliverable assets such as spot Forex, stocks, futures and others.
Why is understanding the Contract Size important for traders?
- Understanding contract sizes can help traders calculate their winnings and losses if a price moves to a certain point.
- Contract Sizes are standardized across various asset types and learning the numbers is not difficult.
- Understanding how contract sizes are calculated can help you choose the right broker. Most brokers display fees and commissions in standard lots but still, there are others that don’t.
Example of Contract Size in Forex
Each standard lot traded in the Forex market is the equivalent of 100,000 (of the base currency). Forex traders use leverage to place orders. Therefore trading standard lots are accessible for most of the investors. For those who cannot deposit large amounts of funds, many brokers are offering Micro account types where traders can place orders using the Micro and Mini lots. Below you can see the valuation of these Lots.
Lot Size | Value | ValuePip |
Standard Lot | 100,000 | 10 USD |
Mini Lot | 10,000 | 1 USD |
Micro Lot | 1000 | 0.1 USD |
Forex trading is a leveraged activity, which means that you can place orders by using borrowed funds from your broker. 100:1 leverage and 1,000 USD in margin enables traders to trade standard lots.
Understanding the contract sizes can help you choose the broker that charges less. When choosing a Forex broker, keep in mind that they charge 2 types of trading fees: spreads and commissions. Usually, commissions are calculated based on the standard Lot traded round turn. Many brokers offer spread-free accounts with less than 7 USD round turn commissions per Lot.
How do you determine Contract Size?
Choosing the right contract size depends on various factors: mainly on your balance size. Trading using Mini and Micro lots are great for testing and backtesting trading strategies in live environments without risking too much money. For average traders trading using Standard Lot will not be an issue.
FAQs on Contract Size in Trading
Who can benefit from standard contract sizes?
Standardization makes trading easier as traders can calculate risks and rewards precisely. Fees and commissions quoted in the standard contract sizes help traders compare brokerage firms and choose the best.
What is contract size in futures trading?
Contract sizes in futures depend on the asset traded. Typically, the size of a futures contract is 100 shares.
Why do some traders trade micro lots?
Micro lots enable traders to test their trading strategies live without risking too much capital. One more reason why some people trade micro lots is because they can’t afford to open Standard accounts.