Pip and lot
Lesson 2 of 31 in the course “Forex”. Free, with animations and a quiz.
Pip
A pip is the standard small step of a rate, used to measure moves. For EUR/USD and most pairs it is 0.0001, the fourth digit after the decimal point. For example: the rate moved from 1.1244 to 1.1245, which is exactly 1 pip. The exception is pairs with the Japanese yen, like USD/JPY. There a pip is 0.01, because the rate looks like 150.25.
Lot: the trade size
A lot is the unit of trade size in forex. A standard lot, or 1 lot, is 100,000 units of the base currency. For EUR/USD that is 100,000 euros. A mini lot, 0.1, is 10,000 units. A micro lot, 0.01, is 1,000 units. The broker lets you open such amounts thanks to leverage, so you need less of your own money. Starting with micro lots makes sense for a beginner: mistakes cost less.
What one pip is worth
Pip value depends on the lot. For EUR/USD: 1 lot is 100,000 euros, and 100,000 × 0.0001 = $10 per pip. A 0.01 micro lot is 100 times smaller: $0.10 per pip. So a 20-pip move against you costs $200 on 1 lot and $2 on a micro lot. Other pairs have their own pip value: on USD/JPY it is about $6.7 per lot when the rate is 150.
Lot size comes from risk
The bigger the lot, the more each pip costs. So the lot is worked out from the amount you are ready to lose. For example: $1,000 deposit, 1% risk = $10. The stop-loss, an order that closes the trade at a loss, sits 20 pips away. $10 ÷ 20 = $0.50 per pip. On EUR/USD that is 0.05 lots. The trap: picking a lot by gut feeling and then being surprised by the loss.
Check yourself
- EUR/USD: 1.1244 → 1.1264. How many pips is that?
Correct answer: 20. 1.1264 − 1.1244 = 0.0020. Divide by the pip size: 0.0020 ÷ 0.0001 = 20 pips. - Which lot size makes sense for a beginner to start with?
Correct answer: Micro lot, 0.01. On EUR/USD a micro lot is about $0.10 per pip, a standard lot is 100 times more: $10. Mistakes on micro lots cost less. - Lot size is chosen based on...
Correct answer: Risk per trade and the stop. First decide how much you are ready to lose and where the stop goes. From that you work out the pip value and the lot.