Forex trading has become a popular way of investing money and earning profits. However, it is important to understand the basics and technicalities of forex trading before venturing into it. One of the fundamental concepts in forex trading is lot size. A lot refers to the size of a trade in forex, which determines the amount of profit or loss a trader can make. Forex traders usually have different lot sizes to choose from, including micro lots. In this article, we will delve into what a micro lot is and how much it is worth in forex trading.
What is a micro lot in forex trading?
A micro lot is a unit of measurement used in forex trading that is equivalent to 1,000 units of the base currency. For example, if a trader is trading the EUR/USD currency pair, and the base currency is the euro, then 1 micro lot will be equivalent to 1,000 euros. A micro lot is also known as a microlot or a micro contract.
The value of a micro lot in forex trading
The value of a micro lot in forex trading depends on the base currency and the currency pair being traded. Let us take an example of the EUR/USD currency pair. If the current exchange rate of the EUR/USD pair is 1.2000, then 1 micro lot will be worth $1.20 per pip. A pip is the smallest unit of measurement used in forex trading, and it represents the change in the currency pair’s price.
To calculate the value of a micro lot in forex trading, you need to know the pip value of the currency pair being traded. The pip value is the value of one pip in the denominated currency of the trading account. For example, if a trader’s trading account is denominated in US dollars, the pip value of the EUR/USD currency pair will be in US dollars. If the pip value of the EUR/USD currency pair is $0.10, then 1 micro lot will be worth $0.10 per pip.
Advantages of trading micro lots
Trading micro lots have several advantages, especially for beginner traders. One of the main advantages of trading micro lots is that it allows traders to start with a small amount of capital. Most forex brokers have a minimum lot size of 0.01, which is equivalent to 1 micro lot. Therefore, traders can start trading with as little as $100, assuming a leverage of 1:100.
Another advantage of trading micro lots is that it allows traders to manage their risk effectively. With a smaller lot size, traders can limit their losses if the market moves against their position. For example, if a trader is using a 1% risk management strategy, they can set a stop-loss order that will limit their loss to 1% of their trading account balance. With a micro lot size, the stop-loss order can be set closer to the entry price, limiting the potential loss.
In conclusion, a micro lot in forex trading is a unit of measurement that is equivalent to 1,000 units of the base currency. The value of a micro lot depends on the base currency and the currency pair being traded. Trading micro lots have several advantages, including allowing traders to start with a small amount of capital and manage their risk effectively. It is important for forex traders to understand the concept of lot size and choose the appropriate lot size that suits their trading strategy and risk management plan.