Before you can judge a spread, a stop-loss or a promotion’s trading conditions, you need to understand pips and lot sizes. These two ideas decide how much money each price movement is worth in your account. This guide explains what a pip is, how lots work, how pip value scales with position size, and how to use that knowledge to size a trade with clearly hypothetical examples.
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What is a pip?
A pip is the standard unit for measuring how far a currency pair’s price has moved. For most pairs, prices are quoted to four decimal places, and one pip is a move in the fourth decimal place, or 0.0001.
For example, if a pair moves from 1.1000 to 1.1025, it has moved 25 pips.
Pairs that include the Japanese yen are usually the main exception. They are typically quoted to two decimal places, so one pip is 0.01. A move from 150.00 to 150.40 is 40 pips.
Pipettes and fractional pricing
Many platforms show an extra digit, which represents a fraction of a pip, often called a pipette. So a price of 1.10254 has a fifth digit worth one-tenth of a pip. This matters mainly when you compare spreads, because a spread of 1.2 pips and a spread of 12 pipettes are the same thing.
What is a lot?
A lot is a standardised quantity of the base currency, the first currency in a pair. Brokers commonly use these sizes, although you should always confirm the contract specifications on your own platform:
| Lot type | Units of base currency | Often shown on platforms as |
|---|---|---|
| Standard lot | 100,000 | 1.00 |
| Mini lot | 10,000 | 0.10 |
| Micro lot | 1,000 | 0.01 |
So if you enter 0.25 lots on a typical platform, you are trading 25,000 units of the base currency.
How pips and lot sizes work together
Pip value is the amount your profit or loss changes for each one-pip move. It depends on three things: the lot size, the size of one pip for that pair, and the exchange rate needed to convert the result into your account currency.
The basic formula is:
Pip value (in the quote currency) = Pip size × Number of units
The quote currency is the second currency in the pair. If your account is held in a different currency, you then convert the result at the current exchange rate.
Hypothetical example 1: a pair quoted in US dollars
Assume your account is in US dollars and you trade a pair where the US dollar is the quote currency.
- Standard lot: 0.0001 × 100,000 = 10 US dollars per pip.
- Mini lot: 0.0001 × 10,000 = 1 US dollar per pip.
- Micro lot: 0.0001 × 1,000 = 0.10 US dollars per pip.
A 25-pip move would therefore be worth 250, 25 or 2.50 dollars respectively. Notice how pip value scales in a straight line with lot size. Ten times the lot size means ten times the money per pip.
Hypothetical example 2: a yen pair
Now assume you trade a pair quoted in Japanese yen, with an account in US dollars, and an invented exchange rate of 150.00 yen per dollar.
- Pip value in yen for one standard lot: 0.01 × 100,000 = 1,000 yen.
- Converted to dollars: 1,000 ÷ 150 ≈ 6.67 US dollars per pip.
Because the conversion rate changes, the dollar value of a pip on this pair changes too. Most platforms calculate this for you, but it is useful to understand where the number comes from.
Using pip value to size a position
Here is where pips and lot sizes become practical. Instead of picking a lot size because it feels right, many traders work backwards from how much they are prepared to lose on a single trade.
A step-by-step method
- Decide your maximum risk in money. For illustration only, suppose a trader with a 5,000-dollar account chooses to risk 1% on a trade, which is 50 dollars. The right percentage is a personal decision.
- Set your stop-loss distance in pips. Suppose the trade idea needs a 25-pip stop-loss.
- Work out the allowed money per pip. 50 ÷ 25 = 2 dollars per pip.
- Convert to lots. On a USD-quoted pair, one micro lot is worth 0.10 dollars per pip, so 2 ÷ 0.10 = 20 micro lots, or 0.20 lots.
- Check margin and costs. Make sure the account has enough free margin, and remember that spreads and other costs add to the total.
If the stop-loss distance doubled to 50 pips, the same method would halve the position to 0.10 lots. As a result, the money at risk stays roughly the same even though the stop is wider. Real outcomes still vary, because slippage and gaps can push losses beyond the planned stop.
Why pips and lot sizes matter for costs
Spreads are usually quoted in pips, so their real cost depends on your lot size. A spread of 1.5 pips costs 15 dollars on a standard lot of a USD-quoted pair, but 0.15 dollars on a micro lot.
That is important when you assess promotions. Some offers require you to trade a certain volume, usually measured in lots, before credit becomes withdrawable. Each of those lots carries spread costs and market risk. Our guides on withdrawal rules explain how volume conditions can work.
Common mistakes to avoid
- Confusing pips and pipettes. Check whether your platform shows four or five decimal places.
- Assuming pip value is always 10 dollars per lot. That is only true for certain pairs with a USD account.
- Sizing by margin instead of risk. Having enough margin to open a trade does not mean the trade is a sensible size.
- Ignoring contract specifications. Lot sizes and pip conventions can differ for some instruments and brokers.
Where to learn more
For independent background on retail forex risk, the CFTC’s Learn and Protect section provides educational material. The National Futures Association (NFA) also publishes investor resources, including guidance on checking firms before you deal with them.
Frequently asked questions
How many pips does a currency pair move in a day?
It varies widely by pair and by market conditions. Rather than relying on a typical figure, look at recent price history for the pair you trade.
Can I trade smaller than a micro lot?
Some brokers allow smaller sizes, while others set the micro lot as the minimum. Check your platform’s contract specifications.
Do pips and lot sizes work the same for gold or indices?
Not necessarily. Other instruments often have their own conventions, so read the specifications before trading them.
The bottom line
Pips and lot sizes turn price movements into money. A pip measures the move, the lot size multiplies it, and the exchange rate converts it into your account currency. Once you can calculate pip value, you can size positions by risk rather than guesswork and see the true cost of spreads and trading conditions.
This article is for educational purposes only and is not financial, investment or legal advice. Rules differ by country and change over time — check the current rules with the relevant regulator and consider speaking to a licensed financial adviser.
