What is a Mini Forex Account
A mini forex account is a type of foreign exchange account which allows trading in mini lot positions. Mini lots are one-tenth the quantity of a standard lot of 100,000 units. Because currencies trade in pips which are one percent of one basis point, or .0001, a one-pip change in the value of a currency pair represents $10. However, that same one-pip move for a mini lot results in only a $1 change in value. Opening a mini forex account is available at most forex brokers and allows for trading in these smaller lots.
BREAKING DOWN Mini Forex Account
Mini forex accounts offer more flexibility for managing risk and allow traders to take positions with less margin. Recommended for beginners, they allow for gaining foreign exchange trading experience at a reduced risk as they become more confident trading currency pairs.
Foreign exchange trading allows traders to use high leverage because brokers often require margins of only one or two percent of the trade to open a position. For example, at a one percent margin, a beginner needs only $1,000 to open a $100,000 trade, which may represent one standard currency pair lot. If the trade should move in an unfavorable direction, more margin may be required so the trader may need to deposit additional funds or be forced to close the trade.
With a mini lot, that same trade could be margined at one-tenth of that size, requiring only $100 in a margin to open a $10,000 trade. Or with a $1,000 on deposit, with the same one percent margin requirement, ten mini lots could be traded instead of one standard lot.
It’s important to note that although forex brokers may only require a small margin which offers high leverage, traders need not open or maintain such highly leveraged positions. Many traders allocate more funds than the minimum margin for a trade so that they may not be forced to close a position too quickly.
How Traders Use Mini Forex Accounts
Because mini lots represent a fraction of the value of a standard lot, it’s possible to use these mini accounts to manage risk better. For example, a trader may decide to open a long position in the euro/U.S. dollar currency pair. If a standard 100,000-unit lot is considered too risky, that trader could open five 10,000-unit lots, equal to only half of one standard lot position.
Even if a trader is confident trading standard lots, mini lots offer more flexibility. For example, a trader may wish to risk more than the value of a 100,000-unit standard lot but decides that two of those lots, which represent 200,000 units, may be too risky. In that case, an in-between trade size could range from as few as 11 or as many as 19 mini lots. This use of mini lots gives the trader a chance to open a position which aligns more precisely with the risk and leverage that seems most appropriate.
Mini forex accounts also offer the ability to scale in and scale out of positions more gradually. A trader may open a few mini lot positions in a currency pair, then add more lots if the trade seems favorable. And, if a position becomes profitable, holding only one standard lot means a trader must close the entire position. However, using ten mini lots as an alternative allows the trader to take some profits off the table by closing five of those ten mini lots and reduce exposure while keeping the rest of the trade open.
Mini lots also allow for more diversification. If a trader can allow the margin for only one or two standard lots, the ability to trade multiple currencies is limited. With the same margin allocated to 10 or 20 mini lots, there are more opportunities to open positions in different currency pairs simultaneously.