Pips, Lots, and the Language of Forex
Before you can size a position or calculate risk, you need to fluency in the basic units of forex: pips, lots, and the math that connects them.
What Is a Pip?
A pip (percentage in point) is the smallest standard price movement in a currency pair. For most pairs, this is the fourth decimal place — 0.0001. If EUR/USD moves from 1.0850 to 1.0851, it has moved 1 pip.
For JPY pairs (e.g. USD/JPY), a pip is the second decimal place — 0.01. If USD/JPY moves from 149.50 to 149.51, that is 1 pip.
What Is a Lot?
A lot is a standardized unit of currency volume in forex:
- Standard lot: 100,000 units of base currency
- Mini lot: 10,000 units
- Micro lot: 1,000 units
- Nano lot: 100 units (not all brokers support this)
Calculating Pip Value
For a standard lot on a USD-quoted pair (EUR/USD, GBP/USD), one pip = $10. For a mini lot, one pip = $1. For a micro lot, one pip = $0.10.
This is the foundational math for position sizing. If your stop loss is 30 pips and you are trading one standard lot, your risk is 30 × $10 = $300. If your account is $10,000, that is a 3% risk per trade — above the level most risk frameworks allow.
Spread: The Invisible Cost
Every forex transaction has a spread — the difference between the bid price (what the market will buy from you) and the ask price (what the market will sell to you). If EUR/USD shows 1.0850/1.0852, the spread is 2 pips. You start every trade 2 pips in the hole.
For a standard lot, a 2-pip spread costs $20. Over 100 trades, that is $2,000 in transaction costs before you have made a single winning trade. Spread management is a real edge component.