Pips, lots and pip values explained

Pip stands for 'percentage in point' or 'price interest point'. It is the smallest standard movement that a currency pair is conventionally quoted to.

For most currency pairs, a pip is the fourth decimal place of the quoted price. If EUR/USD moves from 1.0850 to 1.0851, that is a one-pip move. If it moves from 1.0850 to 1.0870, that is a 20-pip move.

Some brokers also quote a fifth decimal place, known as a pipette or a fractional pip. This represents one tenth of a pip and allows for finer price granularity, but it does not change what a pip itself represents.

Currency pairs that include the Japanese yen are quoted to only two decimal places, because the yen has a much lower face value than other major currencies. For these pairs, a pip is the second decimal place.

If USD/JPY moves from 157.10 to 157.11, that is a one-pip move. If it moves from 157.10 to 157.30, that is a 20-pip move.

The principle is identical. A pip is always the second-to-last digit of the quoted price as conventionally displayed.

A lot is the standard contract size for a forex trade. It represents a fixed quantity of the base currency being traded.

There are three standard sizes:

• One standard lot is 100,000 units of the base currency.
• One mini lot is 10,000 units, or 0.1 of a standard lot.
• One micro lot is 1,000 units, or 0.01 of a standard lot.

Most retail trading platforms allow positions to be sized in increments of 0.01 lots. A trader can therefore open a position of 0.05 lots, 0.37 lots, or any other increment supported by the broker. Larger position sizes mean higher pip values, and therefore larger profits and losses for the same price movement.

Pip value is the monetary amount represented by one pip of price movement, for a given position size.

For most currency pairs quoted to four decimal places, where the quote currency is US dollars, the pip value on one standard lot is approximately $10.

• 1 standard lot of EUR/USD: 1 pip is worth $10
• 1 mini lot (0.1) of EUR/USD: 1 pip is worth $1
• 1 micro lot (0.01) of EUR/USD: 1 pip is worth $0.10

For JPY pairs, where the quote currency is the Japanese yen, the pip value depends on the current USD/JPY rate, but is also conventionally close to $10 per standard lot.

Two traders watching the same chart, taking the same direction, can have very different outcomes if their position sizes are different.

If a trader opens a 0.5-lot position on EUR/USD and the price moves 30 pips in their favour, the profit is approximately 30 pips multiplied by $5 per pip, or $150. The same move against produces a $150 loss.

Pip value is the link between price movement and account impact. Two traders watching the same chart, taking the same direction, can have very different outcomes if their position sizes are different.

A 50-pip move on 1 standard lot of EUR/USD is approximately $500. The same move on 0.1 lots is approximately $50. The same move on 5 standard lots is approximately $2,500.

Position sizing is the discipline of matching the size of a trade to the size of the account, so that an adverse price move does not produce a loss the trader cannot absorb. Pip value is the variable that determines the dollar impact of any given move.