Choosing a proper trading size is vitally important in Forex risk management. Most brokers are offering standard lots for trading to their clients. In addition, you will come across mini, micro, and nano lots. Traders that are trading using micro lots generally have small trading accounts. Trading using a micro lot might not make you rich but it can bring many other benefits. So let’s find out what micro lot means.
Micro lot definition
When you place an order in the forex market, the trading sizes are quoted in lots. A micro lot refers to a lot size of 1,000, as opposed to the standard lot size of 100,000. Micro lots require less liquidity to get filled. You will not notice much of a difference when trading major pairs but when switching to exotics, the low liquidity can become an issue.
Why it is important for traders to understand micro lots
- Understanding micro lot in trading can help traders plan their trades better and take proper risks.
- The lot size determines the size of the trade and the capital required to execute that trade. By choosing proper lot size traders can save their accounts from blowing up.
- Smaller lots are much easier to get filled.
- Trading using micro lots enables traders to experience live trading even with a small trading account balance.
Micro lot explained in more detail
When a trader buys a micro lot, he or she buys 1,000 units of the base currency of a certain pair. Trading is a leveraged activity, which means that investors have the opportunity to place orders using borrowed funds from their broker. However, when trading capital is too small, traders cannot use standard lots and they place orders in Micro lots.
Understanding micro lot in trading is important for traders because it becomes easier to choose a proper trading size when you understand how lots work. Micro lots can help traders live test their trading strategies while risking smaller capital.
Micro lot example in forex trading
Now let’s take a look at micro lot examples in trading. Let’s say a trader has bought 5 micro lots of USD/JPY. It means that the trader has purchased 5,000 US Dollars against the Japanese Yen. If the price goes up and reaches the predicted level, the trader can close the position and take out profits.
FAQs on micro lots
How much is a micro lot in forex?
A micro lot refers to 1,000 units of a base currency in a currency pair. Buying a micro lot in EUR/USD means buying 1,000 euros against the dollar.
What are the pros and cons of micro lots in forex?
Micro lots offered by various brokers help traders that are short in funds to trade. In addition, trading using micro lots help test trading strategies in a live environment while taking smaller risks. Downside of trading using a micro lot is that the potential profit is smaller compared to trading using standard lots.