Most rookies who just entered the Forex market are people that don’t dispose of significant capital so they can put it on risk. In most cases, they are not knowledgeable users and don’t know much about different trading strategies.
In Forex terminology, we regularly speak of lots to express the volume of capital involved after leverage. Here is a brief guide as an introduction to Forex trading, which will help you understand this concept with an extra accent on micro lot Forex trading.
What is a Lot in Forex?
The standard size for a lot represents 100,000 units. There are also mini, micro, and nano lots that are obviously of different sizes equivalent to 10,000, 1,000, and 100 units.
Forex trading lot sizes:
- Standard 100,000
- Mini 10,000
- Micro 1000
- Nano 100
We measure the change in the value of one currency against another in pips, which are very small percentages of a currency unit’s value. To take benefit of these changes in value, you must trade large amounts of a particular currency to see a significant gain or loss.
Suppose you are using a standard size lot of 100,000 units. We will, therefore, recalculate some examples to see how the value of a pip is affected.
- USD/JPY – if the exchange rate is 119.80 (0.01 / 119.80) x 100,000 amounts to $ 8.34 per one pip.
- USD / CHF – if the exchange rate is of 1.4555 (0.0001 / 1.4555) x 100,000 amounts to $ 6.87 per pip.
In the case where the USD doesn’t represent the base currency, the formula is slightly different.
- EUR / USD – at an exchange rate of 1.1930 (0.0001 / 1.1930) x 100,000 amounts to 8.38 x 1.1930 = 9.99734 USD rounded to 10 USD per one pip.
- GBP / USD if the exchange rate is 1.8040 (0.0001 / 1.8040) x 100,000 amounts to 5.54 x 1.8040 = 9.99416 rounded to $ 10 per pip.
Your broker may offer different Pip calculation rules depending on the lot size, but whatever method they use will be able to tell you what the Pip value is inherent in the currency you are trading at any time. The pip’s value changes according to the market and depends on the currency in which you are positioned.
What is a Micro Lot Forex Trading Account?
This kind of Forex trading account is suited the most for retail traders with tight budgets. Micro accounts are also good solutions for traders that are not so comfortable with taking big risks.
Micro accounts are also popular under the name of ”cent account” because here, everything counts in cents. Today it is possible to find the brokers that offer Forex-newbies an entrance into the market with a budget as low as ten dollars. Of course, if you trade in some other currency than dollars, your profit (or loss) will be shown in that currency.
The structure of micro and standard trading accounts is the same. The difference is in the balance display. When it comes to micro accounts, the balance is always displayed in cents. You will also have access to the same trading tools and instruments for both types of accounts.
Who Uses Micro Lot Forex Trading Account
The micro lot (0.01 lot), as the name suggests, is even smaller than the mini lot. It’s a smaller lot size, and each position taken based on a micro lot is equivalent to 1,000 units. Each pip is then equal to 10 cents in the Forex market. This kind of a lot is ideal for novice traders. They can try their hand at Forex by taking small positions and trying out different trading strategies and applying the knowledge acquired through trading courses with very little monetary risk.
How To Spread Gains On Your Micro Lot Account
The most Forex brokers will allow you to create leveraged accounts that will enable you to spread your modest budget by using leverage. That means that you can borrow a certain amount from your trusted broker to use it for trading more significant amounts then your real budget allows.
Like with all the other accounts, risk management is necessary. This includes setting up stop-loss orders, limiting the sums you invest during one open position.
The maximum leverage is something that depends on the specific broker and its regulations. Generally, when it comes to Europe, the maximum leverage doesn’t go up more than 30:1. This limit occurs no matter which type of account you have. However, there are always brokers offering way higher ratios like 500:1. Whatever the leverage ratio limit is, always check if the broker you are about to go with offers negative balance protection. It will shield you from big losses and unnecessary debts.