What Is a Micro Lot?
A micro lot represents 1,000 units of the base currency in a forex trade. The base currency is the first currency in a pair or the currency that one buys or sells. Trading in micro-lots enables retail traders to trade in comparatively small increments.
- 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/or greater fine-tuning of position sizes than a mini or standard lot.
- Other lot sizes include nano lots (100 units), mini lots (10,000 units), and standard lots (100,000 units).
Understanding the Micro Lot
When an investor places an order for a micro lot, this means they have placed an order for 1,000 units of the currency being bought or sold. For example, in the EUR/USD (euro versus the U.S. dollar) currency pair, the euro is the base currency and the trader either buys or sells 1,000 euros.
A micro lot is typically the smallest block of currency a forex trader can trade, and is used by novice traders looking to start trading but who want to reduce the potential downside. While relatively rare, some forex brokers offer nano lots, which are 100 units of the base currency.
Investors use micro lots when they prefer not to trade mini or standard lots. Ten micro-lots equal one mini lot (10,000 units), and 10 mini lots equal one standard lot, which is 100,000 units of the base currency.
Trading in micro-lots does not need to restrict the trader. They can trade as small or as large as they want. They can trade one micro lot, or they can trade 1,000 micro-lots, which is equivalent to 1,000,000 units (10 standard lots) of currency. Micro lots allow for a fine-tuned customization of position sizes, such as 125 micro-lots, which is equivalent to 12.5 mini lots. If the trader could only trade mini lots, they would need to choose either 12 or 13 mini lots, which isn't as fine-tuned as 125 micro-lots.
Most retail brokerage accounts allow traders to trade micro-lots with relatively small initiate deposits, such as $100 or $500.
Nano lots are even smaller, at one-tenth the size of a micro lot. One pip of a currency pair based in U.S. dollars is equal to just $0.01 when trading a nano lot.
Lot Sizes Differences
The smaller unit size allows traders to better control their risk. For example, a one pip move in the EUR/USD with a standard lot results in a $10 profit or loss for the trader. If the trader only has $500 in their account (requires 200:1 leverage), a 5 pip move against them—which can happen in seconds—means they are losing 10% of their account.
With a mini lot (requires 20:1 leverage), each one pip move in the EUR/USD results in a $1 profit or loss. The price would need to move 50 pips for the account to lose 10% of the account. Finally, with a micro lot (requires 2:1 leverage), each pip of movement in the EUR/USD is worth $0.10. For the trader to lose 10% of their account on a trade, the price would need to move 500 pips against them.
These examples show that the smaller unit size of the micro lot is quite beneficial to traders with smaller accounts since it allows for greater flexibility in terms of trades taken, and also the potential for reduced leverage, which reduces the risk of losing more money than what is in the account.
On a $500 account, it only takes approximately 2:1 leverage to buy or sell a 1,000 unit micro lot. Buying a standard lot with a $500 account means approximately 200:1 leverage, and a mear 50 pip move could wipe out the entire account. Forex leverage is capped at 50:1 in the U.S. and in many countries around the world.
Ideal Position Sizing Using a Micro Lot
Forex traders often use micro lots to keep their position sizes smaller to fine-tune risk on a small account.
To find the ideal position size, in micro-lots, the values can be plugged into the following formula:
Dollars to risk / (risk in pips x micro lot pip value) = micro lot position size
$20 / ($50 x $0.10) = 4 micro lots
The ideal position size for the 50 pip stop loss, with the trader being willing to risk $20 on the trade, is four micro-lots. Working backward, if the trader buys four micro-lots, and each one pip move is worth $0.40 ($0.10 x 4 micro lots), if the trader loses 50 pips on four micro-lots they will lose $20.
The formula can be adjusted to mini lots by inputting the mini lot pip value, or standard lots by inputting the standard lot pip value. Note that pips values may vary based on the currency pair being traded.