How Mini Lot Trading Minimizes Risk
Why a Big Market Allows Small Trades
A mini lot is a lot of 10,000 units of a country's base currency. It is called a mini lot because it is only 1/10th of the size of a 100,000 unit standard lot. For instance, if you're trading on an account using U.S. Dollars, a mini lot would be a trade worth $10,000 of USD. A mini lot is a common trade size used in a forex mini account.
Why People Use Mini Lots
Mini lots may not be exciting in terms of price change on a trade, but they have many practical purposes. Because of this, even experienced traders like to use mini lots to finely tune their exposure to a market.
With the increase of algorithmic trading, trade size is rarely done in full blocks because the risk exposure from 500,000 to 600,000 is rather large when you can easily move from 500,000 to 510,000.
Traders Use Mini Lots to Learn and to Limit Risk
Mini lots are also excellent for traders just learning how to trade Forex. A common misconception many traders have is that they can get appropriate feedback on their trading strategy and how well they'll be able to manage risk live by using a practice account.
While entries and exits and risk management can be refined through a virtual money practice account, traders typically don't understand how they will react to big moves in the market until real money is on the line.
To the rescue is mini lots, which help traders get comfortable with how the equity in their account fluctuates based on market moves. Traders know that the larger the trade size, the larger the account equity swings on an absolute basis. An example of incrementally adapting to a situation is the need to use the shallow end of a swimming pool before jumping into the deep end when learning how to swim.
Another reason to use mini lots is to limit risk and to test the market. Limiting risk is done through tighter trade sizes based on quantitative models. You do not have to have a quantitative model to trade the foreign exchange market, but they are common.
Testing the market is something that mini lot traders like to do because it allows them to "load into a trade." For example, instead of a trader opening their fully planned trade size at once, they'll break up their trade into chunks of three. If they were going to originally trade 30,000 on an idea, they might start with 10,000 and see how it goes. If the trade does well they might add another 10 or go ahead and drop the entire 20 on the market. The mini lot way of trading allows them to test their idea with limited risk and therefore is a useful tool for trades of all sizes.