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.
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.
How to Utilize Micro Lot Properly
Who Should Use Micro Lot?
Micro Lot vs Mini Lot
|Micro Lot||Mini Lot|
|1||Perfect for the beginner trader||Perfect for those who want to trade with a lower, or perhaps no leverage at all|
|2||Not all brokers offer a micro lot||Very common in top forex broker|
|3||1,000 currency units||10.000 currency units|
|4||Low execution fee||high execution fee|
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.