What Is Mini Forex?
Traders new to the financial market have many different environments from which to choose for their work. The stock market is just one place for making trades. The foreign currency exchange market, or Forex, is often more popular for novice traders because the law does not require high account balances for Forex day trading. Additionally, the Forex market trades 24 hours a day so you can keep a day job and still learn how to trade. Mini Forex accounts help reduce risk for novice traders.
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Forex
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Whether you trade a standard Forex account, or a mini or a micro Forex account, the concept is the same. A Forex account is a brokerage account that lets you speculate on exchange rates between currencies. In a Forex account, you buy and sell "currency pairs" which are priced at the real-time exchange rate between any two currencies. As the rate fluctuates, the price of a pair changes and you incur profit or loss in your account. Nearly anyone can open a Forex account.
Leverage
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Exchange rates fluctuate by fractions of a penny during the day. To profit meaningfully from these fluctuations, you would need to buy vast sums of currency. However most traders do not work with large capital, so brokers extend "leverage" to the accounts. This allows you to buy more currency than your actual cash balance would normally provide. In the U.S., a broker typically sets up a Forex account with 50:1 leverage. This means that a $1,000 account can buy $50,000 worth of foreign currency. While leverage substantially increases your profit potential, it also opens you to extreme risks where large losses are possible. While the leverage remains the same between most different types of Forex accounts, a mini account helps you control risk by adjusting "lot sizes."
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Lot Sizes
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A Forex "lot" is a single unit of trade, and the smallest position you can buy or sell. The difference between a mini Forex account and a standard account is entirely in this lot sizing. A standard Forex account trades 100,000 units of the currency pair in a single lot. Thus, if you buy 2 lots and the exchange rate is 1.5, then your trade is worth $300,000. With standard leverage of 50:1, you need only $6,000 to place this trade. But the consequences are that each rate fluctuation magnifies your profit or loss because of the 200,000 units of currency in the account. Many traders prefer to trade much smaller sizes. This allows them to reduce their exposure and thus their potential losses, and it also lets them trade with smaller sums of money. A mini account is 10 percent the size of a standard account. Thus 2 lots would be 20,000 units and cost $600 at a rate of 1.5.
Micro Accounts
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Those new to Forex trading may also consider "micro" Forex accounts. These allow a true novice or a student to trade exceptionally small sizes of only 1,000 units per lot. At 50:1 leverage and a rate of 1.5, one lot would only cost $30. The losses are dramatically minimized, and the student can learn without taking on high risks.
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