Another reason for sticking with nano lots (0.01) is the flexibility it gives you in controlling your risk, and compounding your account over time. I’ll cover this in more depth in the Money Management section, but I need to justify my argument here.
Let’s assume you’ve decided to put up $500 to fund your trading account. You’ve been demo trading for a few months, and been reasonably happy with your progress. You’ve listened to all the advice about trading with scared money, and you’re happy to lose this amount, if things don’t work out. It won’t affect you, or your family, and you’re treating it as training funds. If it disappears, you’ll stick some more in while you’re learning. You don’t want to lose it if you can avoid it, but you KNOW that demo trading isn’t real trading, so you are keen to see if you can handle the emotional issues that will come trading with proper money.
Remember, your account is $500 and you’ve decided on 1% as your risk. For all intents and purposes, a mini account is out of the reckoning. With only $500 to play with you may need to risk between 5% - 10% of your account on any single trade simply to place 1 lot, depending on the size of your stop.
Therefore, this leaves us with Micro and Nano Accounts. The next set of examples will use a 65-pip stop loss, and, I hope, will show the extra flexibility of starting with nano-lots. Please note that I’m still dealing with GBPUSD as my pair.
(A) Nano Account (0.01 = $100 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 65 pips
Pip Value: 0.01 (1 cent)
Pip Value risked: 65 * 0.01 = 65 cents
Position Size: $5/0.65 = 7.69 nano lots (0.07 rounded down)
(B) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 50 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 50 * 0.10 = $5
Position Size: $5/$5 = 1 micro lots
(C) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1.5%
Amount Risked: $7.5 (per trade)
Stop Size: 65 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 65 * 0.10 = $6.5
Position Size: $7.5/$6.5 = 1.15 micro lots (1 rounded down)
As you can see it will be necessary to either reduce your Stop (example B), or increase your risk (example C), in order to place your trade.
These smaller lot sizes give you enormous advantages in trade size flexibility. For example, if I had $25k in my nano account (I can hope, can’t I?), and I still worked to 1% risk (assuming a 65-pip stop loss), I could trade 384 nano contracts. In a mini account, with the same $25k, I could only trade the equivalent of 300 (3 mini lots @ 1.00). It’s only 84 contracts, but think how much this would be worth over a series of trades, assuming they’re all winners, of course?
Regarding the question of granularity, Diallist (while vetting my earlier posts), raised another point, as follows:
Let’s assume you’ve decided to put up $500 to fund your trading account. You’ve been demo trading for a few months, and been reasonably happy with your progress. You’ve listened to all the advice about trading with scared money, and you’re happy to lose this amount, if things don’t work out. It won’t affect you, or your family, and you’re treating it as training funds. If it disappears, you’ll stick some more in while you’re learning. You don’t want to lose it if you can avoid it, but you KNOW that demo trading isn’t real trading, so you are keen to see if you can handle the emotional issues that will come trading with proper money.
Remember, your account is $500 and you’ve decided on 1% as your risk. For all intents and purposes, a mini account is out of the reckoning. With only $500 to play with you may need to risk between 5% - 10% of your account on any single trade simply to place 1 lot, depending on the size of your stop.
Therefore, this leaves us with Micro and Nano Accounts. The next set of examples will use a 65-pip stop loss, and, I hope, will show the extra flexibility of starting with nano-lots. Please note that I’m still dealing with GBPUSD as my pair.
(A) Nano Account (0.01 = $100 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 65 pips
Pip Value: 0.01 (1 cent)
Pip Value risked: 65 * 0.01 = 65 cents
Position Size: $5/0.65 = 7.69 nano lots (0.07 rounded down)
(B) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1%
Amount Risked: $5 (per trade)
Stop Size: 50 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 50 * 0.10 = $5
Position Size: $5/$5 = 1 micro lots
(C) Micro Account (0.10 = $1000 position size)
Account Size: $500.00
Risk Profile: 1.5%
Amount Risked: $7.5 (per trade)
Stop Size: 65 pips
Pip Value: 0.10 (10 cents)
Pip Value risked: 65 * 0.10 = $6.5
Position Size: $7.5/$6.5 = 1.15 micro lots (1 rounded down)
As you can see it will be necessary to either reduce your Stop (example B), or increase your risk (example C), in order to place your trade.
These smaller lot sizes give you enormous advantages in trade size flexibility. For example, if I had $25k in my nano account (I can hope, can’t I?), and I still worked to 1% risk (assuming a 65-pip stop loss), I could trade 384 nano contracts. In a mini account, with the same $25k, I could only trade the equivalent of 300 (3 mini lots @ 1.00). It’s only 84 contracts, but think how much this would be worth over a series of trades, assuming they’re all winners, of course?
Regarding the question of granularity, Diallist (while vetting my earlier posts), raised another point, as follows:
- As for granularity, the smaller the better, but the importance of this decreases with an increase in account balance. A micro lot is preferred over a mini lot at all times, but the advantage of increased profits resulting from the finer granularity diminishes as one’s account approaches about $35,000. The larger one’s account, the less important the granularity provided by micro lots becomes. For really huge accounts, even the granularity of a mini lot becomes unimportant.
As your trades run their normal course, and your account balance fluctuates, this flexibility ensures that you can easily keep your trade size equal to your risk profile without having to round your positions up or down to suit the larger minimum lot size offered with a mini account.
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Please post any comments, or questions, in the Discussion thread