Every forex trader needs to understand three building blocks: pips, lots and leverage. Together they determine how much you make or lose on every trade.
What is a pip?
A pip ("percentage in point") is the standard unit for measuring price movements. For most pairs a pip is the fourth decimal place (0.0001). For pairs involving the Japanese yen, it is the second decimal place (0.01).
- EUR/USD moves from 1.0850 to 1.0875 → 25 pips
- USD/JPY moves from 151.20 to 151.65 → 45 pips
Many brokers quote a fifth decimal (a pipette), so 1.08503 is 0.3 pipettes above 1.0850.
What is a lot?
A lot is a standardised trade size:
| Lot | Units of base currency | Pip value on EUR/USD |
|---|---|---|
| Standard lot | 100,000 | $10.00 |
| Mini lot | 10,000 | $1.00 |
| Micro lot | 1,000 | $0.10 |
| Nano lot | 100 | $0.01 |
So if you buy 0.5 lots of EUR/USD and the price rises 40 pips, you make 40 × $5 = $200. Use our pip value calculator for any pair and account currency.
What is leverage?
Leverage lets you control a large position with a small deposit, called margin. With 1:100 leverage, $1,000 of margin controls a $100,000 position (one standard lot).
- Margin required = position size ÷ leverage
- 1 lot EUR/USD at 1.0850 with 1:100 leverage → $108,500 ÷ 100 = $1,085 margin
Check any scenario with the margin calculator.
Leverage cuts both ways
Leverage magnifies losses exactly as much as profits. A 1% adverse move on a 1:100 leveraged position wipes out 100% of the margin used. That is why regulators in the UK, EU and Australia cap retail leverage at 1:30 on major pairs.
Rule of thumb: use leverage to size positions correctly, not to take bigger risks. Decide your risk per trade first, then calculate your lot size with the position size calculator.