Forex Micro Lot

Little Bets Allow Traders To Test Trades

Man on smartphone in front of laptop
Micro lots help traders limit risk. Nikada E+

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.