If you have not heard of nano lots before, then this post is for you. Even if you have heard of nano lots, you may not know all of the benefits of using them in your Forex trading. I will first start by explaining what they are, then I will give you five good reasons to start using them in your trading.
What Are Forex Nano Lots?
Forex is a great market to trade because there is so much flexibility in the position size that you can take in your trades. Other markets don't have nearly as much flexibility.
For example, if you trade futures and want to trade the S&P 500, the smallest lot size that you can trade is a mini contract. That means that the smallest move in this futures contract will equal $12.50.
Your account could fluctuate hundreds or even thousands of dollars a day, just trading the minimum contract size. In addition, the margin (or “good faith” deposit that you put up to enter the trade) is $4,758, at the time of this post.
So much for starting with a small account.
Forex Lot Sizes Explained
In foreign exchange however, there are many more options. These are the lot sizes that you can trade, depending on the broker that you have.
- Standard Lot: 100,000 currency units
- Mini Lot: 10,000 currency units
- Micro Lot: 1,000 currency units
- Nano Lot: 1 currency units
The cost of one currency unit will fluctuate, depending on the currencies you are trading. But if we use the EUR/USD as an example, this is what you might expect the cost per pip to be with the above lot sizes.
- Standard Lot: $10 per pip
- Mini Lot: $1 per pip
- Micro Lot: $0.10 per pip
- Nano Lot: $0.0001 per pip
Wow! As you can see, one nano lot can give you tremendous flexibility to trade even the smallest account. The cost per pip will depend on your broker, so be sure to check with them first.
But the per pip values for the EUR/USD listed above are pretty common among Forex brokers.
Now that you understand how a nano lot works, let's get into why you might want to start using them in your trading.
5 Reasons To Trade Nano Lots
1. You Can Start Small
Regardless if you know that Forex trading is for you, or if you are just trying this trading thing out, it is vital that you keep your risk low in the beginning. Would you learn to be a pilot by starting in a fighter jet? Would you learn to ride a motorcycle on the biggest Harley that you can find?
Of course not.
You will start on something small. Forex trading is no different. Nano lots allow you to start with a very small account and still take the proper amount of risk when trading.
An added benefit to starting with a small account comes into play if you are trying to convince your spouse or other family members to support you in your trading. Starting with a very small account is the best way that I know of to convince them to let you give it a shot.
Even if you only have yourself to answer to, starting with a small account is a great way to keep your losses small while you are learning. Only after you have proven yourself on a small account, should you start risking more money.
2. Reduce Stress
However, sometimes people will get into Forex with an account that is less than $1,000 and choose a broker that only provides micro lots as the smallest lot size. Well, that presents a problem that may not be so obvious at the time that they open their account.
Let's say that you open a $500 account and micro lots are your smallest lot size option. As a beginner, you should be risking only 1% at most, and probably a lot less than that.
However, to make the numbers easy, let's say that you risk 1% on every trade. That means that you can only risk $5 per trade.
If you use the cost per pip in our EUR/USD example, then you can only risk 50 pips on any trade. That is pretty limiting.
There may be times when the trade calls for the stop loss to be set at 75 pips, or even 100 pips. Being limited by the number of pips that you can risk means that you will probably be stopped out more often than necessary.
Risk more than the maximum 1% and you will start to really worry about your trades.
By utilizing the power of nano lots, you can custom tailor your lot size to the individual trade you are taking. You can set a stop loss that makes sense, based on the trade that you are taking an not because of the size of your account.
Using the same scenario above, but using nano lots instead of micro lots, you could risk up to 50,000 pips if you only traded 1 nano lot. I have never heard of anyone needing a 50k pip stop loss, but the point is that it is there if you need it.
3. Find Out If A System Works For You
I believe that backtesting and demo trading are great ways for you to figure out if a system has a chance of being profitable. But as you know, there is no way to tell for sure, until you actually start putting some real money behind it.
You may find that a system backtests well and you are able to demo trade it profitably. But when even the smallest amount of money is on the line, you choke.
By risking a small amount of money, instead a lot of money, you can figure out if a trading system is something that you can actually trade in real life conditions. You might be surprised at what you discover.
4. It's Good Practice
Even if you graduate to larger lot sizes, you will probably hit a few rough patches in your trading. That just the way that trading works.
When that happens to you, it can be very discouraging and it can make you afraid to pull the trigger on your next trades. Going back to nano lots can help you get back into the flow and give you time to get your mojo back.
5. You Can Always Go Bigger
Don't let nano lots fool you, if you need to trade bigger sizes, you can. Need to trade a full sized lot one day?
No problem, just enter 100,000 nano lots. The key is the flexibility and nano lots give you just that.
So which brokers allow you to trade these microscopic lot sizes? There aren't to many out there.
The only nano lot broker that I have traded Forex nano lots with is Oanda. So that is the only broker that I can recommend. They also provide a great risk calculator on the order entry screen, which is handy. But there are other brokers that give you these options too.
Even if you become successful enough to start trading with standard sized lots and move on to another broker, it is useful to keep a small account open with a nano lot broker. You can use it in the future for testing or getting back on the horse after a bad streak.
Whatever the case may be, I believe that the option to trade nano lots should be in every Forex trader's Field Kit.
Do you agree that trading Forex nano lots is beneficial when you are starting out? Let me know in the comments below.
Photo: Tiny Flower