The forex market allows traders to trade in various lot sizes, with micro lots being one of the smallest. Micro lots, often referred to as microlots or micro-trades, are fractional lot sizes that represent 1,000 units of a currency. In forex trading, a micro lot is the smallest position size you can open – one pip of a micro lot equates to $0.10.
Though they come with higher spreads, micro lots are popular for allowing forex traders to open positions with very little capital. They provide the flexibility to start small while you gain confidence and experience in trading. This comprehensive guide covers everything you need to know about trading micro lots in the forex market.
What is a Micro Lot?
A standard lot represents 100,000 units of a currency. The next smallest position size is a mini lot, which represents 10,000 units. Micro lots are the smallest position size, equalling just 1,000 units of currency.
Here is how the different forex lot sizes compare:
- Standard lot: 100,000 currency units
- Mini lot: 10,000 currency units
- Micro lot: 1,000 currency units
When trading a micro lot in EUR/USD for example, you would be buying or selling 1000 euros against the US dollar. One pip movement in a micro lot equates to $0.10 profit or loss. This allows forex traders to open positions with minimal capital investment.
Key Benefits of Micro Lots
Trading micro lots offers several advantages for forex traders:
Low Capital Requirement
The key benefit of micro lots is that they allow you to open a position with minimal capital investment. Each micro lot traded requires approximately $1 margin requirement. This makes forex trading accessible even if you only have a few hundred dollars to start with.
Flexibility in Position Sizing
Micro lots provide greater flexibility in position sizing. You can trade precise position sizes tailored to your risk tolerance and account size. This level of precision helps manage risk and optimizes capital utilization.
Gain Experience Without Blowing Up Account
For novice traders, micro lots are ideal for gaining real market experience. You can practice trading strategies and get familiar with order execution without the threat of large losses from standard lot sizes blowing up your account.
Test New Strategies and Techniques
The low capital requirements of micro lots makes them well-suited for testing out new trading techniques and strategies. You can trade small positions while evaluating the viability of new methods you want to adopt.
Diversify Your Portfolio
Micro lots allow you to diversify your trading portfolio across various currency pairs. You can trade multiple small positions rather than tying up your capital on a few large trades.
Take Advantage of Short-Term Opportunities
Micro lots are useful for capitalizing on short-term forex trading opportunities. You can take advantage of small fluctuations and technical price movements that are unfeasible with larger lot sizes.
Risks and Drawbacks
While micro lots present distinct advantages, traders should also be aware of their drawbacks:
Higher Spread Relative to Position Size
One disadvantage of micro lots is that the spread makes up a larger percentage of the position size. For instance, a 3 pip spread on a standard lot is just $30, while the same spread is $3 on a micro lot – making up a larger portion of the position. The higher spread relative to position size can eat into profits from micro lots.
Difficult to Profit from Small Moves
The small position size also means you need larger price movements to realize meaningful profits. A 10 pip move makes just $1 profit on a micro lot, making it harder to profit from minor market fluctuations. This problem is compounded by the higher relative spread.
Requires Trading Discipline
Micro lots allow opening many small positions, which can encourage over-trading if discipline is lacking. Sticking to a trading plan and prudent position sizing is vital when trading micro lots.
Not Ideal for Long-Term Strategies
Micro lots suit short-term trading due to the higher relative spreads. Long-term buy-and-hold strategies are not ideal with micro lots as the costs negate profits over long periods.
Not Offered by All Brokers
Some forex brokers do not offer micro lots due to the administrative costs involved. So check your broker offers micro lots before opting to trade them.
Getting Started with Micro Lots
If you decide micro lots fit your trading objectives, here are some tips when getting started:
Select a Reputable Broker
Ensure your broker offers micro lots and has competitive spreads to maximize profit potential from small position sizes. Popular brokers like Pepperstone, IC Markets, and Forex.com support micro lot trading.
Use Minimum Trade Size Setting
Most trading platforms have a setting for minimum trade size. Set this at 0.01 micro lots so you don???t accidentally open larger positions.
Start Small
Open positions of 0.50 or 0.25 micro lots when initially trading micros. This lets you get used to the smaller position size.
Set Aside Micro Lot Trading Capital
Allocate a portion of your account balance purely for micro lot trading. This way losses from micro trades don???t eat into capital for your normal positions.
Use Tight Stops
To counter the higher relative spreads, use tighter stops of 5-10 pips on micro lot trades. The smaller stops will help maximize profitable trades.
Trade During Active Hours
Trade sessions like London and New York when spreads are tightest to boost micro lot profitability.
Micro Lot Trading Strategies
You can apply most trading strategies using micro lots. Here are some micro lot strategies to consider:
Scalping
Micro lots are well-suited for scalping strategies that aim to profit from minor price moves. You can scalp moves of just 2-5 pips using micro lot positions. Focus on trading sessions with tightest spreads.
Breakout Trading
Monitoring price action for breakouts and quickly entering micro lot positions in the breakout direction is a simple and effective strategy.
News Trading
Use micro lots to capitalize on the short-term volatility around high impact news events. You can enter positions just before or immediately after the news release.
Support and Resistance Trading
Micro lots allow precise entries and exits around predefined support and resistance levels. Even tight 1-2 pip stops can be used profitably with this style of trading.
Using Indicators
Indicators like stochastic, MACD and RSI can be used to identify trade setups. Enter micro lot positions in the direction signalled by the indicator.
Hedging Strategies
Micro lots can be incorporated into hedging methods. For example, you could open a micro lot position opposing a larger position to reduce downside risk.
The key with any micro lot strategy is using appropriate stop levels and trading during low spread sessions. You should also ensure prudent position sizing so a single trade does not risk excessive capital.
Micro Lot Position Sizing
Position sizing is a critical aspect of risk management in micro lot trading. You want to size positions appropriately within your account balance and risk tolerance. Here are some tips on micro lot position sizing:
Risk Only 1% Per Trade
A general guideline is to risk no more than 1% of your account on a single micro lot trade. For a $1,000 account, 1% is $10 – so micro lot position size should be limited to 1 micro lot.
Consider Spread in Stop Distance
Factor the spread into your stop loss distance. For a 3 pip spread, place stops at least 5-10 pips away to allow price to have space to move in your favor.
Use a Position Size Calculator
Position size calculators help determine appropriate micro lot position sizes based on stop loss, pip risk and account balance inputs. This takes the guesswork out of position sizing.
Scale Positions Across Pairs
You can scale micro lot positions across multiple currency pairs. For example, trade 0.25 micro lots each on EUR/USD, GBP/USD, USD/CAD and USD/JPY simultaneously.
Adjust Based on Volatility
Use smaller position sizes of 0.25 or 0.50 micro lots for volatile currency pairs like GBP/JPY. For quiet pairs like EUR/CHF, trade full micro lots.
Proper position sizing is vital for managing risks and maximizing gains from micro lot trading. Take time to determine suitable position sizes in line with your risk appetite.
What is the Best Forex Pair for Micro Lots?
While micro lots can be traded on all currency pairs, some pairs are better suited due to lower spreads and higher volatility. The best forex pairs for micro lot trading include:
- EUR/USD – Tightest spreads make this ideal for micro lots, despite lower volatility.
- GBP/USD – Offers a good mix of spread and volatility.
- USD/JPY – Higher volatility outweighs slightly higher spreads.
- GBP/JPY – Most volatile major pair but comes with wider spreads.
- Major pairs like AUD/USD, NZD/USD and USD/CAD also work well for micro lot trading. Exotic pairs often have higher spreads, so avoid when trading micros.
The best approach is to assess spreads and volatility to determine which pairs align with your micro lot trading plan. Focus on trading those pairs during the most liquid sessions.
Common Mistakes to Avoid
Like any trading method, micro lots come with some common mistakes to be aware of. Here are some key errors to avoid:
- Poor position sizing – Risking too much per micro trade relative to account size.
- Trading illiquid sessions – Higher spreads from trading outside main market hours.
- Using widening targets – Setting targets too wide negates the benefit of micros.
- Lack of stop loss – Not using stops could lead to large losses on micro positions.
- Over-leveraging – Opening too many micro trades can over-leverage your account.
- Poor broker selection – Using a broker with high micro lot spreads.
- Insufficient trading capital – Under-capitalizing your micro lot trading account.
- Trying to scale profits – Attempting to grow micro accounts too fast; take it slow.
Being aware of these pitfalls will help you avoid common errors and use micro lots effectively within your trading plan.
Micro Lot Trading Tips and Tricks
Here are some additional tips for getting the most out of micro lot trading:
- Trade during volatility spikes for larger moves.
- Use pending orders to enter on breakouts.
- Close partial positions to lock in profits.
- Focus on trading just 3-5 currency pairs you know well.
- Use a micro lot demo account to refine your strategy before trading live.
- Automate your trading system if discretionary trading doesn’t suit micros.
- Don’t get greedy expecting huge returns from micro accounts.
- Track and review your micro lot trades to improve over time.
Applying these tips will help boost your success trading forex micro lots.
Micro Lot Trading – Final Thoughts
For traders starting out or working with limited capital, micro lots are an excellent way to gain live market exposure. The fractional position sizes allow opening positions with minimal required margin. However, the higher relative spreads and need for precision in trade execution pose some challenges.
Employing effective risk management through prudent position sizing is vital to thrive using micro lots. Traders should also select currency pairs wisely, use tight stops, and trade during liquid sessions only. Patience and discipline are essential – micro accounts should be grown steadily through compounding profits.
Used prudently, micro lots can be a stepping stone to eventually trading larger position sizes. They provide an avenue to hone your skills while avoiding the risk of large losses. Over time, the experience gained from micro lot trading can pave the way to substantial profits from bigger positions.
