Trading Mini Lots in Forex Reduces the Risks

Before getting to the issue of mini lot itself, it is important to make clear some important information about forex trading first.

Currency trading always involves two currencies that are called currency pair. In a currency pair one currency is called the base currency, while another one is quote currency or counter currency. Base currency is the currency that the trader buys or sells. The first (stronger) currency in a currency pair (i.e. in a currency pair EUR/USD Euro is the base currency), while the second currency (quote) is considered to be weaker. The price of the stronger currency is expressed in the money equivalent of the weaker currency. For example, in the currency pair EUR/USD EUR is the base currency, because it is more expensive than dollar and thus stronger, while USD is counter currency, since it is weaker. Thus, the price of Euro is expressed in dollars, e.g.: 1 euro = 1,5 US dollars. It is important to remember that the loss or profit is always measured in the counter currency.

The typical size the currency pair has is 100 units, which is called the standard lot. However, there exists such a notion as a mini lot which is 10 units (10% of the standard lot). Here it is important to keep in mind what a pip is and what role it plays for the notion of mini lots.

Pip is the minimum unit by which a price in a currency pair changes. Usually is measured in thousandths. For instance, in case EUR/USD quotation is 1.6678 and it shifts to 1.6679, it is said to increase for1 pip. The value of 1 pip is measured by the volume of the traded lot. So, if the pip move is 1 pip, in case if the standard lot (100 units) is traded, the profit will be 10$, however, in relation to the mini lot, the profit will be 1$, since mini lot is 10% of the standard lot as it has been mentioned. What is important, in case the deal is unsuccessful, the loss will be also just 1$, and not 10$, as with the standard lot.

The true importance of trading mini lots lies in the diversity of options it gives as far as corresponding the size of the trade to the level of risk is concerned. Using minis a forex trader can trade equal of the standard lot by trading 10 mini lots. Thus, minis offer flexibility which standard lots don’t possess.  A trader can merely lessen the risks by reducing the minis to the number that would be the same as stop-loss risk.