Pips and Lot Sizes
Pips and lot sizes are fundamental in forex trading. If you do not understand them, you cannot properly calculate your risk. In this article, we explain them.
What Is A Pip?
A pip (Percentage in Point) is the smallest price unit in forex. For most currency pairs, a pip is the fourth decimal (0.0001). For JPY pairs, it is the second decimal (0.01).
Example
If EUR/USD goes from 1.1050 to 1.1051, that is an increase of 1 pip.
What Is A Lot Size?
A lot size determines how large your position is. There are three standard lot sizes:
1. Standard Lot (1.0)
A standard lot is 100,000 units of the base currency. 1 pip = $10 (with USD quote currency).
2. Mini Lot (0.1)
A mini lot is 10,000 units. 1 pip = $1.
3. Micro Lot (0.01)
A micro lot is 1,000 units. 1 pip = $0.10.
How To Calculate Your Risk?
Step 1: Determine your risk
Decide how much you want to risk per trade, for example, 1% of your account.
Step 2: Determine your stop loss
Decide at what level your stop loss goes, for example, 50 pips.
Step 3: Calculate your lot size
If you want to risk $1,000 and your stop loss is 50 pips:
- Standard lot: 50 pips x $10 = $500 risk
- Mini lot: 50 pips x $1 = $50 risk
- Micro lot: 50 pips x $0.10 = $5 risk
Pip Value Differences
Pip value differs per currency pair. For pairs with USD as quote currency, it is simple. For other pairs, you need to convert.
Tips
- Always start with micro lots as a beginner
- Use a position calculator
- Never risk more than 1-2% of your account per trade
- Understand your pip value before opening a trade
Conclusion
Pips and lot sizes are the basics of forex trading. Make sure you understand them well before you start trading. It can make the difference between profit and loss.
