Micro Lot Definition Example Trading Formula Vs Standard Lot
A micro lot represents 1,000 units of the base currency in forex trading. It allows retail traders to trade in small increments. Forex traders can also trade in mini and standard lots.
Key Takeaways:
– A micro lot in forex trading is 1,000 units of the base currency in a currency pair.
– A micro lot allows for smaller positions and greater flexibility in position sizes compared to mini or standard lots.
– Other lot sizes include nano lots (100 units), mini lots (10,000 units), and standard lots (100,000 units).
When an investor places an order for a micro lot, they are ordering 1,000 units of the currency being bought or sold. For example, in the EUR/USD currency pair, the trader buys or sells 1,000 euros.
A micro lot is typically the smallest block of currency a forex trader can trade. While some forex brokers offer nano lots (100 units), micro lots are more common.
Micro lots allow traders to customize their position sizes. They can trade as small as one micro lot or as large as 1,000 micro lots (equivalent to 10 standard lots). This fine-tuning is not possible with mini lots, as traders would have to choose between 12 or 13 lots.
Most retail brokerage accounts allow traders to trade micro lots with small initial deposits, such as $100 or $500.
Nano lots are even smaller, at one-tenth the size of a micro lot. One pip in a currency pair based in U.S. dollars is equal to $0.01 when trading a nano lot.
The smaller unit size of micro lots allows traders to better control their risk. For example, with a standard lot, a one pip move in the EUR/USD results in a $10 profit or loss. With a micro lot, each pip movement is worth $0.10.
In terms of risk management, micro lots offer more flexibility for traders with smaller accounts. With a micro lot, a trader would need the price to move 500 pips against them to lose 10% of their account.
By using micro lots, traders can fine-tune their position sizes based on their risk tolerance and account size.
To find the ideal position size in micro lots, traders can use the following formula:
Dollars to risk / (risk in pips x micro lot pip value) = micro lot position size
For example, if a trader wants to risk $20 with a 50 pip stop loss, the ideal position size would be four micro lots.
The formula can be adjusted for mini and standard lots by inputting the corresponding pip values. Note that pip values may vary based on the currency pair being traded.
