The foreign exchange market, usually known as “forex” or “FX,” is the largest financial market in the world. A massive $5 trillion exchange hands in the market per day. If you compare this to the New York Stock Exchange (NYSE), the largest stock exchange in the world where only a “meager” $22.4 billion is traded per day, you would conclude that it is indeed huge. To profit from the foreign exchange market, traders and investors use different strategies. The aim of every trader and investor for using those strategies is to make money while keeping their losses small. One strategy which has proved particularly useful to small retail and beginner traders is micro-trading.
What is Micro Trading?
In forex trading, there are three common types of accounts available to traders. They are micro account, standard account, and mini account. The difference is based on the size of the contracts that can be traded in different accounts. A micro account is thus a forex trading account which allows traders to trade contracts for 1,000 units of currency. The type of trading conducted on such account is therefore also known as micro-trading. Because micro-trading allows forex traders to trade with amounts smaller than what was traditionally possible, it has continued to gain more popularity with many traders across the world.
What are the features of micro-trading?
Micro-trading has as its primary feature its small size. The adoption of micro-trading, micro-investing, and micro-account has lowered the threshold for entering the forex market for beginner traders and investors. Specifically, micro-trading requires the investment of only a small amount and allows the trader to trade in smaller increments. Because of the smaller operations and smaller transactions of micro-trading and micro-accounts, they do not, therefore, pass through the interbank foreign exchange market. Instead, the broker with whom the accounts are opened is the one in charge of routing the transactions and monitoring them.
Micro-trading: what are its advantages?
Obviously, the most significant advantage of micro-trading is that it allows anyone interested in the forex market to get into the market quickly. Also, it enables the investor to trade without having to risk large sums of money. Hence, it is recommended for beginners. Beginners are advised to open micro-accounts because of their low minimums and their lesser risk compared to other types of accounts. The beginners can thus easily practice and acquire quality trading experience using them without any high risk and before they move to high-risk trades.
Large forex investors sometimes also use micro-trading as a strategy to hedge against risk in their larger trades. Besides, since the brokers who offer micro-accounts do so at less expense and less risk and are confronted with aggressive competition within the industry, they provide acceptable spread and exchange rates. Generally, micro-trading makes micro-investing a possibility and is, therefore, an effective strategy for speculating in forex especially for those who do not yet know the basics of online trading and the dynamics of the foreign exchange market.
Disadvantages of micro-trading
Micro-trading, of course, is not without its drawbacks. First, trading in small lots is not always good in forex trading. Investors are more likely to over-leverage when they trade in small lots of currency pairs. When over-leveraged trades do not result in winning trades, they produce a large amount of loss. Thus, micro-traders have a high chance of having their accounts wiped out in situations of a series of consecutive losing trades.
Also, using micro accounts places limitations on an investor’s potential to make a profit. This is because of the lower risk taken and the short-term horizon in which the gain is expected. Thus, if not correctly managed, micro accounts can expose your money to loss rather than protect it from loss. Even if you can control the urge to over-leverage your investment, the downside potential of your account, because of its small size, is still very high. Therefore, instead of being less risky, micro-trading can be riskier and more expensive for you in the long run.
What should you do before you open a micro-trading account?
The forex industry is not without its problems. There is a slew of scammers seeking to prey on both novice and experienced investors alike. Javelin Strategy & Research reported that $16 billion was lost worldwide to various types of fraud, scams and identity theft in 2016 alone, a 16% increase over 2015. Since, losses due to investment scams have still not declined. Therefore, you should be very wary of investment scams in their different forms. Of those investment scams, one of utmost concern is broker scams. It is crucial for you to do your research before you choose your broker. You should identify and select from brokers that are reliable and avoid the ones that are not.
Therefore, before you open your micro-trading account, you should first consider the reliability of your potential forex broker. Then, you should also pay attention to specific essential parameters such as the spreads and rates, withdrawal, communication, penalties, and trading commissions. Consequently, watch out for reviews of the broker. Assess its status with regulatory authorities. Also, make sure there are no complaints about withdrawal.
Moreover, check if the broker does not trade against its clients. Importantly, you should seek to know if the trading platform and trading tools offered by the broker are easy to use. It might be necessary for you to find help and directions from experienced traders on how you can maximize your micro-trading strategy.
Once you make the choice of your forex broker and open a micro-trading account, you can start trading. You then become a micro-investor. There are many trading strategies for you to pick from. You can choose to trade naked or trade with a range of technical indicators. Naked trading is trading without indicators. A naked forex trader only focuses on simple price action and chart patterns. For naked traders, this trading strategy simplifies the trading process. It enables the traders to work toward gaining a mastery of the basic rhythm of the market without leaning on any indicator as a crutch.
However, if you are not interested in naked trading, you can do equally well using indicators. All you have to do is to choose your indicators well. As no single indicator can give you all the information about the market at any time, combining two or three indicators may prove helpful for your trading. Therefore, you can use a range-bound indicator like the stochastic to determine where the market conditions could be overbought or oversold and volume to assess market strength or weakness by assessing the volume of transactions in a particular market direction at a time.
Finally, whichever the strategy you decide to trade with, the most important thing is to increase your profits and minimize your risk.