Pip value and sizing from risk
Lesson 3 of 31 in the course “Forex”. Free, with animations and a quiz.
Pip and lot: the two basics
EUR/USD = 1.1244 means 1 euro costs 1.1244 dollars. EUR is the base currency, the one you buy or sell; USD is the quote currency, the one the price is in. A pip is the standard price step: on EUR/USD it is 0.0001. From 1.1244 to 1.1245 is a 1-pip rise. A lot is the trade size: 1 standard lot = 100,000 units of the base currency, and there are fractions too: 0.1 and 0.01 lots.
A pip is worth different amounts
Pip value is how much money you make or lose when price moves 1 pip. 1 lot of EUR/USD: 100,000 × 0.0001 = $10. 1 lot of USD/JPY: 100,000 × 0.01 = 1,000 yen, which at a rate of 150 is 1,000 / 150 ≈ $6.7. Gold XAU/USD: 1 lot = 100 ounces, so a $0.10 move gives 100 × 0.10 = $10. And 0.01 lots is 100 times smaller: $0.10 per pip on EUR/USD.
The fifth digit and the yen pip
Brokers often show price with five decimals: 1.08505. The pip is the fourth decimal, and the fifth is a pipette, a tenth of a pip. 10 pipettes = 1 pip. For yen pairs such as USD/JPY a pip is 0.01, the second decimal, and the pipette is the third: 150.125. The trap: a “20” in your terminal may be 20 pipettes, which is only 2 pips.
Lot size comes from risk
Risk is how much you are ready to lose if your stop-loss is hit, the order that closes the trade at a loss automatically. Formula: lot = risk in $ / (stop in pips × $ per pip on 1 lot). Example: $1,000 account, 1% risk = $10, 20-pip stop on EUR/USD. 10 / (20 × 10) = 10 / 200 = 0.05 lots. Rule: stop first, then lot, never the other way round.
Why 1% and not 10%
1% per trade is a popular rule of thumb, not a law. The picture shows five losses in a row, each counted from the current balance. At 1% risk you keep 0.99 to the fifth power ≈ 95.1%: minus 4.9%, and you can calmly carry on. At 10% risk you keep 0.9 to the fifth power ≈ 59%: minus 41%, which is very hard to win back. Everyone has losing streaks, so size your lot so a streak cannot kill the account.
Check yourself
- What is one pip worth on 1 lot of EUR/USD?
Correct answer: $10. 1 lot = 100,000 euros, 1 pip = 0.0001. 100,000 × 0.0001 = $10. - Risk $20, 20-pip stop on EUR/USD. Which lot size?
Correct answer: 0.10. Lot = 20 / (20 × 10) = 20 / 200 = 0.10. Then a 20-pip stop costs exactly $20: 0.10 lots gives $1 per pip. - What is one pip in USD/JPY?
Correct answer: 0.01. For yen pairs a pip is the second decimal: 150.00 → 150.01. 0.0001 is the EUR/USD pip, and 0.001 on yen is just a pipette.