Pips, lots and leverage

Three terms come up constantly in forex: pips, lots and leverage. You need all three to work out your risk.

Pips

A pip is a standard unit of price movement. For most pairs it is the fourth decimal place, 0.0001. For yen pairs such as USD/JPY it is the second decimal place, 0.01.

If EUR/USD moves from 1.1200 to 1.1220, that is 20 pips.

Lots

• Standard lot: 100,000 units of the base currency
• Mini lot: 10,000 units (0.10 lots)
• Micro lot: 1,000 units (0.01 lots)

On EUR/USD, one pip is worth about $10 on a standard lot, $1 on a mini lot and $0.10 on a micro lot. The value differs on other pairs, so check your platform.

Leverage

Leverage lets you control a large position with a small deposit, called margin. At 100:1, a $1,000 margin controls a $100,000 position.

Leverage does not change how much a pip is worth. It changes how large a position you are able to open. High leverage makes it easy to take far too much risk, and some brokers will close your trades automatically if your margin runs too low.

Key point

Available leverage is a limit and not a target. Your position size should come from your risk and your stop, whatever leverage your broker offers.