Forex Micro Accounts

So what makes a forex micro account so much different from an ordinary investment account? Why can’t currency traders just use one account nor matter its size to buy and sell currencies just like stock, option, and bond traders use one account to make trades both big and small? The difference is in the market.

A micro account, by definition, is a forex account that is sized large enough to trade the smallest possible mini lot on the foreign exchange markets. In forex, there are two types of lots: whole lots and mini lots, with mini lots being 1/10th the size of a whole lot. A whole lot is made up of 100,000 units of a paired currency, thus one lot of USDJPY would be made up of $100,000 in cash. A mini lot of USDJPY, however, would be worth $10,000.

Naturally, a change in the lot size also means a change in the value of a pip. So, where an ordinary lot of currency is worth $100,000 and $10 per pip, a mini lot is worth $10,000 and then $1 per pip. If the value of USDJPY were to rise from 81.00 to 82.00, a change of 100 pips, an investor with a whole lot would take home $1,000, where an investor with a mini lot would earn only $100 on the trade.

Why lots matter
Forex brokers that make up the foreign exchange market prefer to use lots in completing trades because it allows for a much more liquid market. If investors were able to buy and sell large currency stakes with units of single dollars, it is certain that the market would be far less liquid. Having a standard size per transaction means that one order fills another in an even lot match up at a certain price.

This benefit, though, isn’t much of a benefit for the small forex trader. Since the individual investor is unlikely to have hundreds of thousands of dollars in capital required to reach buying power where ordering multiple lots makes sense, the individual investor is given better access into the market with mini lots.

At 50:1 leverage, a mini lot is bought and sold for $200 in account balance, compared to $2,000 for much larger full lot positions. Thus, individual investors who have only $10,000 to fund up a forex account could risk as little as 2% per mini lot per trade with a forex mini account, compared to 20% per lot per trade with a regular lot forex account.

Minis aren’t second-rate
Even professional investors tend to use mini lots because of their flexibility. By purchasing mini lots, you can essentially own as many lots as you would prefer, and also have the flexibility to own partial lots. Where brokers that require buy and sell orders in whole lots might buy 3 lots, another broker would allow an investor to buy 30 mini lots –the same amount of currency—or 29, or 31 mini lots equal to 2.9 or 3.1 lots.

At present, most every broker offers either mini lots or whole lots, or a combination of each. Only a few brokers, with Oanda being perhaps one of the most credible, offer investors the opportunity trade in units, or single pieces of currency. At Oanda, forex traders could buy $5000 in currency, or $4999 in currency, or even $1 in currency, if they so desired. Most brokers, though, realize that unit orders are more expensive to place on the market and rarely offer investors the opportunity to trade in single units.

When opening an account, be sure to choose a mini lot account if you plan on trading with an account balance of less than $100,000, as any smaller account balances would best fit in a forex mini account, not a full lot account.

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