Forex trading is fast becoming popular with thousands of investors across the globe. In the past to trade on any sort of markets, one had to be physically present. Advances in communications now mean that anyone with access to an internet connection has access to the same markets that were previously the preserve of professionals. Modern computers are also now powerful enough to allow average investors to trade on the forex markets from the comfort of their homes.
One divide that still exists though, is access to capital. Foreign currency is traded on the forex markets in lots of 100,000. The size of these lots traditionally meant that only investors with deep pockets were invited to the table. One way of getting over this limit, was to leverage any capital an investor had. While amplifying potential profits, leverage increase the risks and potential lots for the investors too.
The latest innovation in the forex markets, are products allowing investors to trade in mini and micro lots.
Mini lots are currency lots that are just 1/10th the size of the standard lots, or 10,000 currency units. Micro lots are lots that are 1/10th of mini lots or 1,000 currency units.
There are many advantages for investors trading in these mini and micro lots. The examples below illustrate this.
Currencies are traded, and quoted in pairs. An example quote might be 1.5432 for the USD/EUR. An investor wanting to buy a standard lot at this rate, would need to have $154,320 in capital available in their account with a brokerage firm. A mini forex account would only require them to buy 10,000 units for just $15,432. Clearly the smaller lots mean more and more people can directly invest in and trade on the currency markets.
As noted, leverage was used to increase an investor’s capital to trade. Bigger trades though mean bigger exposure to both profits and losses. Extending the example above, we can assume that the investor did have $15,432 to invest or by this currency pair. If we assumed that they bought the currency, and that there was a 32 pip drop in price, their loss would be $32.
If they had leveraged their initial $15,432, in order to buy a standard lot, their exposure would be $154,320. The same 32 pip drop in the price of the currency pair would mean a loss of $320, or ten times the unleveraged amount.
There are no real disadvantages of trading forex through mini accounts. The accounts still benefit from the same trading software, resources, tools and prices that the standard accounts offer. In fact, they do offer more opportunities for more investors to improve their trading methods and strategies without the huge risk and anxiety that comes with the large profit and loss swings of standard lots. The smaller trades also allow investors to better customise their trades as part of a bigger risk or money management strategy.
Similarly, mini-forex accounts generally do not have a maximum trading volume. So, seasoned traders, or traders who have particular confidence in their analysis can still use the same accounts to place trades equivalent to standard lot trades.