Pips, Lots, and Position Sizing

Before you place a single trade, you need to speak the language. The three most fundamental terms in forex are pips, lots, and position size.

A pip is the smallest standard price movement in a currency pair. For most pairs, it is the fourth decimal place. If EUR/USD moves from 1.0850 to 1.0851, it moved one pip. If it moves from 1.0850 to 1.0900, it moved fifty pips. For Japanese yen pairs, a pip is the second decimal place — USD/JPY moving from 150.00 to 150.01 is one pip.

Why does this matter? Because your profit and loss is measured in pips. If you buy EUR/USD at 1.0850 and sell at 1.0880, you made thirty pips. The question is: how much is thirty pips worth in dollars?

That depends on your lot size. A standard lot is 100,000 units of the base currency. On EUR/USD, one pip on a standard lot is worth roughly ten dollars. So thirty pips on one standard lot equals roughly three hundred dollars profit.

But you do not need to trade standard lots. A mini lot is 10,000 units — one pip equals about one dollar. A micro lot is 1,000 units — one pip equals about ten cents. Most beginners should start with micro lots until they are consistently profitable.

Position sizing is how you decide how many lots to trade. The golden rule: never risk more than one to two percent of your account on a single trade. If you have a one thousand dollar account and you risk two percent, that is twenty dollars maximum per trade. If your stop loss is twenty pips away, you need a position size where twenty pips equals twenty dollars — which is a micro lot.

This math might seem tedious, but it is the single most important calculation in trading. Position sizing is what keeps you alive long enough to become profitable. Every professional trader sizes their positions carefully. Every amateur blows up because they do not.