Micro Lot – Forex Academy

Introduction

USDJPY is the abbreviation for the currency pair US dollar against the Japanese yen. This currency pair is very liquid and volatile. It is classified as a major currency pair. Here, USD is the base currency, and JPY is the quote currency. The currency pair shows how many JPY are required to purchase one US dollar.

Understanding USD/JPY

The exchange rate of USDJPY represents the units of JPY equivalent to one US dollar. For example, if the value of USDJPY is 109.550, then these many Japanese yen are required to buy one US dollar.

USD/JPY Specification

Spread

Spread is simply the difference between the bid price and the ask price. It depends on the account type. The average spread for ECN and STP account is shown below.

Spread on ECN: 0.5

Spread on STP: 1.2

Fees

The fee is basically the commission charged by the broker on each trade. Typically, the fee on STP accounts is nil, and there is some fee on the ECN account. There is no fixed fee on the ECN account and varies from broker to broker.

Slippage

Slippage is the difference between the price needed by the trader and the real price the trader was executed. Slippage happens when orders are executed as market orders. The slippage is usually within the range of 0.5 to 5 pips.

Trading Range in USD/JPY

The trading range is the representation of the minimum, average, and maximum volatility on a particular timeframe. It shows the range of pips the currency pair moved on a given timeframe. These values prove to be helpful in assessing a trader’s risk and controlling their cost on a trade.

USD/JPY PIP RANGES

Procedure to assess Pip Ranges

Add the ATR indicator to your chart
Set the period to 1
Add a 200-period SMA to this indicator
Shrink the chart so you can assess a large time period
Select your desired timeframe
Measure the floor level and set this value as the min
Measure the level of the 200-period SMA and set this as the average
Measure the peak levels and set this as Max.

USD/JPY Cost as a Percent of the Trading Range

Just knowing how many pips the currency pair moved is pointless. To bring it some value, it is clubbed with the total cost to understand how the cost varies based on the volatility of the market. It shows cost and volatility are dependent on each other.

The relation between Cost and Volatility

Cost and volatility are inversely proportional to each other. When the volatility of the market is low, the costs are high; and when the volatility is high, the cost is low. More on this is discussed in the subsequent section.

ECN Model Account

Spread = 0.5 | Slippage = 2 | Trading fee = 1

Total cost = Slippage + Spread + Trading Fee = 2 + 0.5 + 1 = 3.5

STP Model Account

Spread = 1.2 | Slippage = 2 | Trading fee = 0

Total cost = Slippage + Spread + Trading Fee = 2 + 1.2 + 0 = 3.2

The Ideal way to trade the USD/JPY

The above two tables are formed by finding the ratio between the total cost and the volatility. It is then expressed in terms of a percentage. Comprehending the values is simple. It is based on the relation between cost and volatility. If the percentage value is high, then the cost is high for that particular volatility and timeframe. It can be inferred that the min column has the highest values compared to the average and max column. This simply means that the costs are high when the volatility of the market is low. Hence, it is recommended to open/close positions when the volatility is at or above the average mark.

Furthermore, apart from volatility, the cost is heavily affected by the slippage. As mentioned, this happens due to market order executions. Hence, to reduce your cost by up to 50% on each trade, it is recommended to trade using limit orders and not market orders.

Introduction

In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are combines into different tradable sizes, and they are called as ‘Lots.’ Hence, to buy and sell currency pairs, you must trade in the form of lots. There are different lot sizes depending on the number of units you trade. For example, 10,000 units are referred to as a mini lot and 100,000 units as a standard lot. Now, in this lesson, we shall understand other lot sizes along with some examples.

What is a lot in Forex?

A lot in Forex is the number of units of a currency pair. Note that one unit is not equal to one lot. Instead, a collection of units of a currency pairs make a lot. And depending on the number of units that are involved in making up a lot, there are different lot sizes in the market.

Different Types of Lots in Forex

Depending on the number of units, we can classify Lots in four types.

Standard Lot

The size of this lot is 1 and is made up of 1000,000 units of a currency pair. So, buying 100,000 units of EURUSD is as good as saying you have bought 1 lot of EURUSD.

Mini Lot

In terms of lot size, the quantity of ‘lots’ in a mini lot is 0.1. And one mini lot consists of 10,000 units of a currency pair.

Micro Lot

The quantity of lots in a micro lot is 0.01. And this lot is made up of 1,000 units. So, buying is 1 micro lot means, buying 0.01 lots or 1,000 units.

Nano Lot

0.001 lots make up one nano lot, and it consists of 100 units of a currency pair.

Now, let us take some examples and clear out the differences in these types.

Examples

E.g., 1: Buying 5 standard lots.

Lot size distribution = 5 * 1 standard lot

Number of units = 5 * 100,000 = 500,000 units

E.g., 2: Selling 1.5 standard lots

Lot size distribution = 1 * 1 standard lot + 5 * mini lots

Number of units = 1.5 * 100,000 = 150,000

E.g., 3: Buying 3.2 mini lots

Lot size distribution = 3 mini lots + 2 micro lots

Number of units = 3.2 * 10,000 = 32,000

Leverage trading

You must have seen brokers who let traders trade with as low as $100. In fact, they let you trade mini lots with it. Now, you must be wondering how one can trade 10,000 units with just $100 in their account. Well, this is facilitated by the brokers as they offer to trade with ‘leverage.’

In leverage trading, brokers let you take positions larger than the capital you possess. And as far as the mechanism of this is concerned, a broker lends you with the required money to take a position. And for this, they keep some amount of your capital as deposits. This deposit stays with them until your trade is open. When the trade is closed, the complete deposit is returned back to you. Leverage, also referred to as margin, is usually measured in ratios or in percentages. A detailed explanation of this shall be discussed in further lessons.

Hence, this completes the lesson on Forex lots and its types. And below is a quiz to help you check if you have grasped the concept better.

[wp_quiz id=”45130″]