What is a Micro Lot in Forex?

If you're new to Forex trading, you may have heard of the term "lot size".The lot size refers to a specific amount of transactions in foreign exchange transactions, representing the number of base currency units bought or sold. In Forex trading, there are three main types of lot sizes: standard, mini, and micro. A micro lot is the smallest contract for foreign exchange trading, it is worth 1,000 units of the base currency of the exchange rate being traded. Because a micro lot uses a smaller position to reduce potential risks, it is benefit for the Retail traders to use a micro lot who generally wants to start forex trading , but don't want to risk too much capital, as well as beginners to trading.

Understanding Lot Sizes

Lot size refers to the number of units of a particular currency pair that you buy or sell in a trade. There are three types of lot sizes：

Standard Lot Size: A position size of 100,000 units of the base currency.

Mini Lot Size: A position size of 10,000 units of the base currency.

Micro Lot Size: A position size of 1,000 units of the base currency.

As mentioned above, a micro lot is the smallest lot size to trade,

1 mini lot = 10 micro lots = 10,000 currency units

1 standard lot = 10 mini lots = 100 micro lots = 100,000 currency units

Standard lots

Standard lots are typically used by professional traders and institutional investors due to the large amount of capital required to trade them effectively. Because standard lots require a larger amount of capital to trade, they also come with higher margin requirements. This means that you'll need to have more money in your trading account to cover the potential losses from your trades. Standard lots are often used for longer-term trading strategies, such as swing trading or position trading, where traders hold their positions for days, weeks, or even months at a time.

The mini lot

The mini lot is 10 times that of the micro lot, but it is still the most commonly used lot in trading. Mini lots require less capital to trade than standard lots, which can make them more accessible to traders with smaller account balances. Mini lots are often used for shorter-term trading strategies, such as day trading or scaling, where traders hold their positions for on ly a few hours or minutes at a time.

The micro lot

The micro lot, as the smallest lot account, can better control potential losses. The reason why investors open a micro account is that it enables even small-scale retail traders to trade like professionals. Potential traders can buy and sell forex pairs like anyone with a standard account, but with far less equity. There is almost no minimum deposit required to use a micro account, but standard accounts typically have minimum deposits ranging from $500 to $10,000.

Position Sizing and Risk Management

Proper position sizing and risk management are crucial in Forex trading. With Micro Lots, traders can manage risk with smaller positions, which can be particularly helpful for those who are new to trading.

To calculate your position size based on your risk tolerance, you can use a position sizing calculator. Forexample,Suppose a trader wants to buy GBP/USD at 1.3350 and set a stop loss at 1.3300, risking 50 pips. They aim to risk $20 or 2% of their account, which has $1,000 in capital.

To determine the appropriate position size for this trade, the following formula can be used:

Risk amount in dollars / (risk in pips x pip value of one micro lot) = micro lot position size

In this case, the calculation is as follows:

$20 / (50 x $0.10) = 0.04 micro lots

Therefore, 0.04 micro lots is the ideal position size for a stop loss of 50 pips when the trader intends to risk $20 on the trade. If the trader loses 50 pips on four micro lots, they will lose $20, with each pip movement worth $0.40. This calculation method can also be used for mini and standard lots by inputting their respective pip values. It's important to note that the pip value may vary depending on the currency pair being traded.

Benefits of Trading Micro Lots

Using micro lots first can help reduce risk as it offers lower capital requirements and allows traders to hold smaller positions, thereby reducing their risk exposure. This is a great option for beginners and traders who want to test their trading strategies in the forex markets

Second, it offers more granular, flexible transactions. Traders can use smaller increments to open and close positions. for example, 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. but with standard lot, if trade goes against them with five pips, it means they're losing 10% of their entire capital.

Micro lots also offer the possibility of frequent trading. When you trade with micro lots, you can enter and exit the market frequently without too much capital burden. Another advantage of Micro Lot trading is that it gives traders the opportunity to gain experience without high stakes. Since the position sizes are smaller, traders can practice their strategies and test their skills without risking large amounts of money.

Brokers and Micro Lot Trading

Not all forex brokers offer Micro Lot trading. When choosing a broker, it's important to consider whether they offer Micro Lot trading and compare their spreads and commissions for Micro Lot trading.

XM:

XM offers micro lots on its MetaTrader 4 and MetaTrader 5 platforms. The minimum deposit for a micro account is $5, and the minimum trade volume is 0.01 lots (1,000 units of the base currency). Traders can use leverage of up to 1:888.

FXTM:

FXTM offers micro lots on its MetaTrader 4 and MetaTrader 5 platforms. The minimum deposit for a micro account is $10, and the minimum trade volume is 0.01 lots (1,000 units of the base currency). Traders can use leverage of up to 1:1000.

HotForex:

HotForex offers micro lots on its MetaTrader 4 platform. The minimum deposit for a micro account is $5, and the minimum trade volume is 0.01 lots (1,000 units of the base currency). Traders can use leverage of up to 1:1000.

RoboForex:

RoboForex offers micro lots on its MetaTrader 4 and MetaTrader 5 platforms. The minimum deposit for a micro account is $10, and the minimum trade volume is 0.01 lots (1,000 units of the base currency). Traders can use leverage of up to 1:2000.

OctaFX:

OctaFX offers micro lots on its MetaTrader 4 platform. The minimum deposit for a micro account is $100, and the minimum trade volume is 0.01 lots (1,000 units of the base currency). Traders can use leverage of up to 1:500.

Drawbacks and Considerations

One of the main drawbacks of Micro Lot trading is the limited return potential. This is because the position size is smaller with micro lots, which also means that potential returns are also limited. While this may not be an issue for some traders who prioritize lower risk and consistent, steady gains, it can be a drawback for those looking to make larger profits.

Another limitation of trading with micro lots is the higher transaction costs. This is due to the need to open and close more positions, which can result in higher fees and commissions. These additional costs can eat into profits and make it more difficult to achieve a positive return on investment (ROI).

Additionally, trading with micro lots can limit a trader's exposure to the market. This is because they are not taking on as much risk as they would with larger position sizes. While this can be beneficial for those who want to limit their exposure to potential losses, it can also mean missing out on potential gains.

Another consideration with Micro Lot is some trading strategies may not work as well with micro lots. This is because the smaller position size could potentially limit the effectiveness of certain techniques. For example, some strategies may rely on larger position sizes to generate significant profits, making them less effective when trading with micro lots.

Conclusion

Micro Lot trading can be a useful tool for beginner traders who are looking to manage risk and gain experience in Forex trading. However, it's important to remember that proper risk management is still necessary even with Micro Lots. Traders should always use stop loss and take profit orders to manage risk and protect their capital.