Micro lot size forex

Choosing a Lot Size in Foreign Exchange/Forex Trading.

What Is a lot? A lot references the smallest available trade size that you can place when trading the Forex market. Typically, brokers will refer to lots by increments of 1000 or a micro lot. It is important to note that lot size directly impacts the risk you are taking.

Therefore, finding the best lot size with a tool like a risk management calculator or something with a desired output can help you determine the desired lot size based on the size of your current accounts, whether practice or live, as well as help you understand the amount you would like to risk.

Lot size directly impacts how much a market move affects your accounts so that 100 pip move on a small trade will not be felt nearly as much as the same hundred pip move on a very large trade size. Here is a definition of different lot sizes you will come across in your trading career as well as a helpful analogy borrowed from one of the most respected books in the trading business.

Using Micro Lots.

Micro lots are the smallest tradable lot available to most brokers. A micro lot is a lot of 1000 units of your accounting funding currency. If your account is funded in US dollars a micro lot is $1000 worth of the base currency you want to trade. If you are trading a dollar-based pair, 1 pip would be equal to 10 cents. Micro lots are very good for beginners that need to be more at ease while trading.

Using Mini Lots.

Before micro lots, there were mini lots. A mini lot is 10,000 units of your account funding currency.

If you are trading a dollar-based account and trading a dollar-based pair, each pip in a trade would be worth about $1. If you are a beginner and you want to start trading using mini lots, be well capitalized.

$1 per pip seems like a small amount but in forex trading, the market can move 100 pips in a day, sometimes even in an hour.

If the market is moving against you, that is a $100 loss. It's up to you to decide your ultimate risk tolerance but to trade a mini account, you should start with at least $2000 to be comfortable.

Using Standard Lots.

A standard lot is a 100k unit lot. That is a $100,000 trade if you are trading in dollars. The average pip size for standard lots is $10 per pip. This is better remembered as a $100 loss when you are only down 10 pips. Standard lots are for institutional-sized accounts. That means you should have $25,000 or more to make trades with standard lots.

Most forex traders that you come across are going to be trading mini lots or micro lots. It might not be glamorous, but keep your lot size within reason for your account size will help you to survive long term.

A Helpful Visualization.

If you have had the pleasure of reading Mark Douglas' Trading In The Zone , you may remember the analogy he provides to traders he has coached that is shared in the book. In short, he recommends likening the lot size that you trade and how a market move would affect you to the amount of support you have under you while walking over a valley when something unexpected happens.

Expanding on this example, a very small trade size relative to your accounts would be like walking over a valley on a very wide and stable bridge where little would disturb you even if there was a storm or heavy rains.

Now imagine that the larger the trade you place the smaller the support or road under you becomes.

When you place an extremely large trade size relative to your accounts, the road gets as narrow as a tightrope wire, such that any small movement in the market much like a gust of wind in the example, could send a trader the point of no return.

Lots, Leverage and Margin.

Lots, leverage and margin are all pretty boring subjects. However, if you’re going to become a Forex trader, it is vital that you know about them all. One exception to this rule is traders from the U. K. who spread bet. Spread betting usually works differently. So, if you’re spread betting you should be able to skip this article.

What is a lot in forex?

In the previous article you learned what a pip is and how to calculate the value of a pip. You probably remember that we got some extremely low pip value, on USD/CHF one pip was worth only 0.00009250 USD.

Well, $0.00009250 USD is the value of a pip per unit and the standard size of a lot is 100,000 units of the base currency. To open a trade, you need to buy or sell one or more lots. So, if you open a long trade with one standard lot on USD/CHF, you would be buying 100,000 units. Since USD/CHF has a per unit pip value of $0.00009250 USD, your pip value would be $9.25 USD per pip ($0.00009250 x 100,000 units).

$9.25 USD per pip may sound like a lot. However, there are several different lot sizes in Forex:

Standard lot = 100,000 units of base currency Mini lot = 10,000 units of base currency Micro lot = 1,000 units of base currency Nano lot = 100 units of base currency.

Nano and micro lots are a fantastic way to trade Forex without risking much money. When you first start trading, you do not want to be trading standard lots. If each pip is worth $9 USD, and you lose 100 pips, thats $900 USD gone. Micro lots allow you to learn Forex without risking the house.

Now you can calculate the value of a pip per lot. The pip value we calculated in the previous article was based on a single unit. So, for every unit traded on a GBP/USD trade a pip is worth $0.00009998 USD. With a mini lot you have 10,000 units open, so each pip will be worth $0.9998 USD. Calculating how much you will make per pip on a trade is straight forward.

First step: Calculate the per unit value of a pip.

Second step: Multiply the per unit value by the lot size you are using.

If the US dollar is not quoted first and you want the pip value in US dollars, the formula is a little different.

First step: Calculate the per unit value of a pip.

Second step: Multiply the per unit value by the lot size you are using.

Third step: Multiply the value per pip by the rate of the pair.

Round this up to $1 per pip.

These numbers still don’t seem very good. Why would you want to invest $10,000 and earn only $1 per pip? Well, with leverage, you don’t have to invest that much.

What is Leverage?

Leverage allows you to trade more units than you have. So if you have a mini account with a $1,000 (1,000 units) balance and you enter $100 (100 units) into a trade you can hold a $10,000 (a 10,000 unit) position. In this case, you would have 100:1 leverage. For every $1 you put into the market your broker puts in $99 to make it $100.

The important thing to remember about leverage is that it does not affect the value of a lot. You know that a mini-lot is 10,000 units of currency and a standard lot is 100,000 units. The value of these never changes no matter what your leverage is. If you have 400:1 leverage a mini-lot is still roughly $1 a pip. If you have 100:1 leverage that same mini-lot is still roughly $1 per pip.

Leverage does not affect the value of a lot but has an effect on the number of lots you can have in the market, based on the capital in your account.

The reason they call it leverage is because it is much like trying to lift a very heavy object. Some objects are just too heavy to lift. However, with the right leverage it’s easy. If you have 100:1 leverage you can trade a mini lot (10,000 units) with just 100 units.

Leverage may sound great, but it can cause problems too. The higher your leverage the more of your capital you can risk at one time, in comparison to a lower leverage.

If two traders have the same amount of capital, let’s say $10,000 USD, and one has 100:1 leverage and the other has 400:1 leverage, the trader with 400:1 leverage will be able to risk more of his $10,000 at one time than the trader with 100:1 leverage. The trader with 400:1 leverage is required to have less in their account to cover their position.

Let’s use some round numbers in order to better understand this concept. Again, take two traders with $10,000 USD in their accounts. Trader 1 takes a long position at 100:1 leverage on currency pair X/Y and buys 1 mini lot (10,000 units). Trader 2 takes the same long position at 400:1 leverage on currency pair X/Y and buys 1 mini lot (10,000 units).

Since Trader 1 has 100:1 leverage then he is required to have 100/1 or 1% of the position in his account. So for Trader 1 he will need to have at least $100 in his account which is 1% of 10,000 (1 mini lot). Since Trader 2 has 400:1 leverage then he is required to have 400/1 or 0.25% of the position in his account. For Trader 2 he will need to have at least $25 in his account which is 0.25% of 10,000 (1 mini lot).

Leverage be extremely dangerous. If you have $1,000 account with 400:1 leverage, for $100 you could trade four mini lots. If you take take a 100 pip loss on a trade, you could lose $400 on just one trade. You need to be very careful with leverage. In the end though, you are the one that determines the degree of your leverage. Your broker can only determine the maximum leverage allowed. If you choose to use the maximum that is up to you.

What is Margin?

Margin is a good faith deposit required by your Forex broker to cover the position you have entered into the market. Without providing this margin, you would be unable to use leverage as this is what your broker uses to maintain your position, and to cover any potential losses.

Different brokers will insist on different levels of margin depending on a number of factors such as the currency pair you are trading and the leverage of your account.

The currency pair you are trading is a factor in how much margin is required because each currency pair moves different. You’ll tend to find that the more volatile pairs tend to move more in an average day. This means the margin required to trade those currencies is likely to be higher.

Also since margin is normally quoted in percentage terms, such as 0.25%, 0.50% or 1%, then this tends to increase as leverage decreases.

The easiest way to think of margin is that it is the 1 in the leverage ratio. So for instance, if your leverage is 100:1 your margin is how much is in your account (represented by the 1). This will dictate how much you can place in the Forex market. this means if you have a mini account and place a $10,000 position in the market, you’ll need at least $100 to even open the trade.

What’s a Margin Call and Should I be Afraid of one?

A margin call is what happens when you have no money left in your account. To protect you from losing more money than you have your broker closes out your positions. This means you can never lose more money than you have in your account.

Before learning what a margin call is you need to know the definitions of two terms.

Used Margin: The amount of money in your account that is currently used in open trades. If you have $6,000 capital in an account and you have $1,000 in an open trade then your used margin is $1,000. If you have $3,000 capital in an account and you currently have $600 in an open trade your used margin is $600.

Usable Margin: The amount of money in your account minus any open trades. We will continue from the same examples used above. If you have $6,000 capital in an account and you have $1,000 in an open trade your usable margin is $5,000. If you have a $3,000 capital in an account and you currently have $600 in an open trade your usable margin is $2,400.

When your usable margin reaches $0 your broker will automatically margin call you. With good money management this should never happen but newbies can slip up.

Below are a few examples of margin calls:

Tom opens a standard Forex account with $4,000 and 100:1 leverage. This means that on each trade Tom must enter a minimum of 100,000 units ($100,000). With 100:1 leverage Tom must enter $1,000 of his own money to each trade.

Tom analyzes GBP/USD and decides that the pair is going up. He opens a long position with 2 standard lots on GBP/USD. This means Tom is trading $2,000.

Disaster strikes GBP/USD goes down instead of up. Tom curses himself for taking a long but he keeps the position open. If Tom keeps the position open and it moves too far against him he will get a margin call.

Before Tom opens his position he has $4,000 in usable margin. After opening a position with 2 standard lots ($2,000) his used margin became $2,000 and his usable margin became $2,000. If GBP/USD drops by too many pips and Toms useable margin reaches $0 his broker will close out his trade. This protects Tom from losing more money than he has in his account.

Mary opens a mini Forex account with $1,000 at 100:1 leverage. She analyzes EUR/USD and decides to go short. Mary enters 7 mini lots ($700) short on EUR/USD. Before entering the positions, Mary’s usable margin was $1,000. Now that she is in the trade her usable margin is $300.

Again disaster strikes and Mary’s trade goes against her. If Mary’s usable Margin reaches $0 her trade is automatically closed, so she cannot lose more money than she has in the account.

Margin calls are easily avoided if you trade sensibly. However, this is more advanced stuff that you will learn later in the free Forex course.

It is very important that you check what the margin polices are with your broker. Margin policies can differ from broker to broker so if you plan to open an account remember to ask.

Forex Micro Lot.

Little Bets Allow Traders To Test Trades.

Deciding what trade size to use is an incredibly important decision that many traders ignore.

For traders unsure about the best way to minimize costs when learning how to trade the market, a micro lot can be an easy and quick solution. A micro forex lot represents 1k of whatever currency your account is funded with. If your account is funded with US Dollars, a micro lot would be $1000.

What Is a Micro Lot?

A micro lot is equal to 1/10 of a mini lot of currency.

A standard lot is 100,000 units at $10 per PIP if the counter currency is the US dollar and a mini lot is 10,000 units at one dollar per PIP if the counter currency is the US dollar on the trade. If another currency like the Japanese yen or British pound or Canadian dollar is the counter or second currency in the currency pair, a market price conversion will determine the per PIP cost.

On the same line of thought as Margin, a micro lot allows you to get into the market with less commitment. Many traders appreciate this during volatile times. A micro lot allows traders to dip their toes in the market to get a feel for how aggressive the market is moving and what costs they might occur for holding on to trade for a long period.

A micro lot allows traders with a smaller account balance to trade the market that may have priced them out of beforehand. This is very helpful to new traders or traders that just don't have the high equity needed to trade many markets.

A micro lot also allows traders to reduce their commitment to any one currency pair and can spread out their exposure. This is known as diversification and can allow you to avoid the negative consequences of one large move.

How to Prevent Common Trading Mistakes with the Micro Lot.

A common mistake for many new traders is to over leverage.

Traders tend over leverage because they are overconfident on the trade idea. However, market outcomes are risk-based and purely ambiguous at the time of entering the trade. Therefore, reducing your exposure with the mini lot or micro lot can allow you to enter a trade with less exposure to market volatility. Of course, this does mean that the trade moves in the direction you expected it to when you entered the trade, you will win less it also allows you to be around for the next trade should the market move against you.

Learning not to over leverage also aligns nicely with having a good risk to reward ratio, which starts with having a proper stop loss and take profit point on a trade. A trader who comes into the market with a decent strategy and enters with a trade size appropriate or smaller to their account size along with a good risk to reward ratio is often far ahead of the trader who has a well-crafted out trade idea, but who over leverages on the trade and does not set an appropriate stop or limit.

Micro-Lot.

DEFINITION of 'Micro-Lot'

A micro-lot is the equivalent to a contract for 1,000 units of the base currency in a forex trade. The base currency is the first currency in a pair or the currency that the investors buys or sells. Trading in micro-lots enables traders to trade in small increments.

BREAKING DOWN 'Micro-Lot'

When an investor places an order for a micro lot, this means they have placed an order for 1,000 units of the currency being bought or sold. For example, in the EUR/USD currency pair, the euro is the base currency and the trader either buys or sells 1000 euro.

A micro-lot is the smallest unit of currency trading and is used by novice traders looking to start trading but who want to reduce the potential downside. Investors use micro-lot sizes when they prefer not to trade mini or standard lots. Ten mini lots are equal to 100 micro lots, which is equal to one standard lot.

Most retail brokerage accounts allow traders to trade micro-lots with minimal initial deposits.