Using Micro Lots In Forex Trading For Best Position Size
When we hear the word micro lot, we think of small accounts with high leverage. Although this may be true, Micro lots are the best way to size yourself right up to the % Risk that you want. In reality, micro lots do not exist in contract form. Micro lots are more the ability of your broker to accept orders in increments of $1000. For example, BUY $138,000 Micro verses BUY 130,000 Mini verses BUY $100,000 Standard. Look at the example below to show how you can buy more money while using the same % Risk, depending on the type of contract you use with your order.
Let’s say you have $46,988 in your account and you want to risk 1%, hence $469 rounded down.
If your stop is 30 pips on the GBPUSD, look at the difference of what you can buy using different lot sizes.
Standard Lots – GBPUSD
We want to risk 1% so that is $469
Let’s say we have a stop of 30 Pips. In standard lots thats 30 Pips * $10 = $300
$469 / $300 = 1.56 Rounded down to 1 lot of $100,000
So we would buy $100,000 and your broker would get an order in Dollar amount for $100,000
So one Pip = $10 on the position we are going to take.
TOTAL RISK = $300 or .64% of the 1% you wanted to risk
Position that moves in your direction 90 Pips wins $900
Mini Lots – GBPUSD
We want to risk 1% so that is $469
Let’s say we have a stop of 30 Pips. In mini lots thats 30 Pips * $1= $30
$469 / $30 = 15.6 Rounded down to 15 lots of $10,000
So we would buy $150,000 and your broker would get an order in Dollar amount for $150,000
So one Pip = $15 on the position we are going to take.
TOTAL RISK = $450 or .96% of the 1% you wanted to risk
Position that moves in your direction 90 Pips wins $1350
Micro Lots – GBPUSD
We want to risk 1% so that is $469
Let’s say we have a stop of 30 Pips. In mini lots thats 30 Pips * $.1= $3
$469 / $3 = 156.3 Rounded down to 156 lots of $1000
So we would buy $156,000 and your broker would get an order in Dollar amount for $156,000
So one Pip = $15.60 on the position we are going to take.
TOTAL RISK = $468 or .997% of the 1% you wanted to risk
Position that moves in your direction 90 Pips wins $1404
I hope this shows you importance of sizing right up to the % that you want to risk. The real difference is between the Standard and Mini lots as you can see in the example above. If your broker offers Minis then you can still use then to get much closer to your intended % Risk. Both Micro and Minis are better than a standard lot.
Using Micro or Minis will also give your R-multiples a much more even distribution in your loss column. You will have a line of -1% for every loss +/- slippage verses a line that consist of -.7% , -.9%, -1%, -.8% and so on. If you decide to risk 1% it is important for every trade to be at that level across all contracts so you can see the win in relation to the losses equally and to ensure that when a big winner does come that you are risking the full 1%. It would be awful to catch 4 winners in a row that were only sized up to .7% verses 1%. You would now only be up 2.8% verses 4%.
This may look a little complex. But math does line up and if you want to excel in trading it is one of the subjects that is very important. Professional traders often see this as more important than the system that gives them signals to buy and sell.
I love idea of micro (or mini) Forex accounts and micro lots! I started to trade forex year and half ago for two reasons: I was always interested in investments in currencies and there was possiblity to open an account and start trading with $100! Only in this case I was able to start my forex venture. $500, $1000 and more for me (and for much other retail traders) is whole fortune and lot of us can not afford to risk this amount of money. So, it is great that we have possiblity to start forex investments with only few bucks.
Today I have more funds for investments than two years before, so I am able to deposit more in forex accounts with my brokers. But I made first steps in forex with small account and mini investmens and on this way I learned how to trade and how to be profitable. So, I am very thankful to idea of micro lots and mini forex accounts!
Another excellent point! Not only can we use better position size on medium to large accounts, but also use small accounts to learn, while not losing our shirt.