Pips, Lots and Leverage!

What is a Pip?

Typically in forex, currency pairs display their prices with four decimal points. A few, such as those that involve the Japanese yen, display two decimal places. No matter what currency pair you’re trading, the last large number behind the decimal always represents a pip, the main unit price that can change for the currency pair. As you trade, you’ll track your profits (or losses) in pips. At some Broker, you’ll see a smaller number behind the pip—this is called a "fractional pip" and offers even more precise pricing.

 

What is a Lot?

In forex, a lot is a standard unit of measurement. At most forex dealers, one standard lot usually equals 100,000 units of currency. Since those amounts would make trading prohibitive for the average trader, brokers introduced a concept called leverage.

 

What is Leverage?

One of the benefits of this market is the ability to trade on leverage. You don’t need $10,000 in your account to trade the EUR/USD. Currency pairs can have a leverage ratio of up to 1:100 or even higher. This means you can control a large position ($10,000) with a small amount of money ($100).

 

How Pips, Lots and Leverage work together?

Let's imagine you just bought 100,000 EUR/USD on a 1:50 leverage.

You purchased at 1.3000 and then closed the trade by selling at 1.3020. This means you've earned 20 pips.

 

0.0001 x US$100,000 = US$10 per pip.

 

For your 20-pip trade, you would have earned US$200.