Complete Micro Lot Forex Trading Guide for Beginners


The size of a trading position in forex is used to narrate by the trading term called “Forex lot”. A forex lot comes with an allusion to a grade of 100,000 units of the base currency. Below we provided a basic idea on Micro lot and how it works in forex trading. 

02 July 2020 | AtoZ Markets – Micro Lot is mostly used by the beginner trader as they are not interested in exceeding the risk limit. Most of the broker provides micro lot trading facilities with low spread and high leverage, depending on account size. It is an excellent opportunity for novice traders who want to start their journey in forex trading without taking a huge risk. A trader can slowly elevate a micro lot to mini lot and then a standard lot, as they gained experience in trading. But the micro lot trading is the best option for them for favourable risk/reward ratio.

What Is Micro Lot in Forex Trading?

In a forex trading, micro-lot is a 1,000 unit of the base currency. The currency that the investors buy or sell is the first currency of that pair, which is called the base currency. For small enhancement, a trader can use micro-lot.

If an order of 1,000 units of the currency being purchased or sold means that the investor has placed an order for a micro lot. For example, in the GBP/USD (Great Britain pounds versus the U.S. dollar) currency pair, the pound is the base currency. So 1,000 pounds either will be bought or sold, by the trader.

Micro Lot

How Does Micro Lot Work?

A forex trader can trade a micro-lot which is the minimum block of currency. Moreover, apprentice traders use it to start trading and want to diminish the probable downward. Some forex brokers confer 100 units of the base currency means Nano-lots, though it is comparatively infrequent.

When investors do not want to trade mini lots or standard lots, they use micro-lot. Ten micro-lots equal one mini lot that is 10,000 units of the base currency. And ten mini lots equal one standard lot that is 100,000 units of the base currency.

The smaller unit size is more convenient for better risk control. For instance, if a trader wants to gain $10 profit per pip move in the GBP/USD pair, a trader has to open one standard-lot trade. If the trade goes against them with five pips and they have only $500 in their trading account, it means they’re losing 10% of their entire capital.

On the other hand, one pip move in the GBP/USD can gain profit or loss of $1, with a mini lot. For a 10% loss, the trade needs to move 50 pips for the account. Finally, for each pip movement in the GBP/USD pair is the value of $0.10 cent, with a micro lot (requires 2:1 leverage). The price needs to move 500 pip against the trade if the trader loses 10% of their account on a position.

The instance displays that the tiny unit size of the micro-lot is very gainful to traders with tiny capital since it takes into account more prominent adaptability regarding trades held. Moreover, trade needs to have $500 in their trading account to take nearly 2:1 leverage to buy or sell a 1,000 unit. A fifty pips move against the trade can wipe out $500 account if the trader opens a standard lot, which requires 200:1 leverage. In the United States and most of the countries in the world allowed only 50:1 leverage in forex trading.

How to Utilize Micro Lot Properly

A forex trader frequently utilizes micro-lot in their trading to minimize the risk on a small account. For example, a trader wants to purchase the GBP/USD at 1.3350 and place a stop loss at 1.3300. So, they are risking 50 pips. They intend to risk $20 or 2% of their account, while they have $1,000 capital in their account.
The standard may connect to the accompanying formula:
Risk amount in Dollar / (risk in pips x micro lot pip value) = micro lot position size
$20 / (50 x $0.10) = 0.04 micro lots
Micro-Lot
So, the 0.04 lots are the ideal position size with a stop loss of fifty pips, when the trader intends to risk $20 on each trade. Moreover, when the trader loses fifty pips on four micro-lots, they will lose $20, while every single pip move is worth $0.40 cents. Besides, this calculation method may use to the mini lot by inputting mini lot pip value. Also, in the standard lot by inputting a standard lot of pip value. It should be noted that the pip value may change depending on the currency pairs.

Who Should Use Micro Lot?

There are no particular rules which can use a micro lot in forex trading. Every single trader has access to choose lot size depending on how much leverage they are taking or how much amount they have in their account. Even some broker offers Nano lot to trade in a forex account, but this is very rare. Furthermore, when a beginner trader is trying to learn forex trading and not willing to take the risk, micro lot trading is ideal for them. They can take micro-lot to minimize their risk and can gain a good amount of profit, without blowing up their entire account. Furthermore, professional traders or hedge fund managers very often use micro-lot because they have huge capital on their trading account. They are always interested in the standard lot and takes high leverage. Because high risk can return them a high reward, huge loss as well.

Micro Lot vs Mini Lot

There are not so different between micro-lot and the mini-lot. It depends on trading account size and traders mindset. Key differences are below in the chart:
Micro LotMini Lot
1Perfect for the beginner traderPerfect for those who want to trade with a lower, or perhaps no leverage at all
2Not all brokers offer a micro lotVery common in top forex broker
31,000 currency units10.000 currency units
4Low execution feehigh execution fee

Summary

Let’s summarise what we have learned today about a micro lot: 

  • A micro lot is 1,000 units of the base currency in a currency pair.
  • A micro lot considers smaller positions as well as more noteworthy calibrating of position sizes than a mini or standard lot.
  • Nano lot size equal to 100 units, mini lot size equal to 10,000 units and standard lot size equal to 100,000 units.
In addition, the forex lot is a very important part of what traders should take into account since placing on trade. A trader always should use lot sizes depending on their capital to admissible risk limit. Lot sizes will, consequently, must be calculated as while picking a broker when financing the trading account and unquestionably before setting on a trade position.
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