What Is a Pip?
A pip (Percentage in Point) is the smallest standard price movement in forex trading. For most currency pairs, one pip equals 0.0001 โ the fourth decimal place. For JPY pairs, one pip equals 0.01. When EUR/USD moves from 1.0850 to 1.0851, that's a one-pip movement. Understanding pips is essential because your profit and loss is measured in pips multiplied by your position size.
Pip Value Calculation
The value of one pip depends on your position size and the currency pair. For a standard lot (100,000 units) on EUR/USD, one pip equals $10. For a mini lot (10,000 units), one pip equals $1. For a micro lot (1,000 units), one pip equals $0.10. Knowing your pip value is critical for calculating risk before entering any trade.
What Is a Lot?
A lot is the standardized unit of measurement for position size. Standard lot: 100,000 units of the base currency. Mini lot: 10,000 units (0.1 lots). Micro lot: 1,000 units (0.01 lots). Most retail traders use mini and micro lots because standard lots require significant capital. Your lot size determines how much you make or lose per pip movement.
Understanding Leverage
Leverage allows you to control a larger position with a smaller amount of capital. 1:100 leverage means you can control $100,000 with just $1,000 of margin. While leverage amplifies profits, it equally amplifies losses. A 1% move against you at 1:100 leverage wipes out your entire margin. This is why risk management is more important than leverage.
The Leverage Trap
Beginners are attracted to high leverage because it seems like free money. The reality: high leverage is the number one account killer. Professional traders at institutions typically use effective leverage of 1:5 to 1:10. Prop firms cap leverage at 1:30 to 1:100. If professionals use low leverage with millions of dollars, retail traders with small accounts should be even more conservative.
Margin and Margin Calls
Margin is the amount of capital required to open and maintain a leveraged position. If your losses approach your available margin, your broker issues a margin call โ requiring you to either deposit more funds or close positions. If you don't act, the broker will liquidate your positions automatically. This is why you should never use more than 1-2% of your account on a single trade โ it keeps you far from margin call territory.
Practical Example
Account: $5,000. Risk per trade: 1% ($50). Stop loss: 25 pips. Pip value needed: $50 รท 25 = $2 per pip. This equals 0.2 lots (2 mini lots) on EUR/USD. At 1:100 leverage, this requires $200 margin โ well within your $5,000 account. Use our free position size calculator to compute this automatically before every trade.