Pips, lots and position size
In the previous lesson, you learned how currency pairs are quoted. Now you will connect changes in those prices to trade size using three basic ideas: pips, lots and position size. These measurements help explain how a small market movement can create a larger or smaller change in your account balance.
1. Measuring movement in pips
A pip is a standard unit used to describe a change in a currency pair’s price. For most forex pairs, one pip is 0.0001, or the fourth decimal place. If EURUSD moves from 1.0850 to 1.0860, it has risen by 0.0010: a movement of 10 pips. Pips make it easier to compare price changes without repeatedly writing long decimal numbers.
For pairs quoted in Japanese yen, one pip is usually 0.01. A move in USDJPY from 150.20 to 150.30 is therefore also 10 pips. MT5 may display additional decimal places, such as EURUSD at 1.08503. That final digit represents a fractional pip. For a five-decimal EURUSD quote, one platform point is 0.00001, so 10 points equal one pip.
2. Understanding lots
A lot describes the quantity traded. In standard forex terminology, one standard lot represents 100,000 units of the base currency, which is the first currency in the pair. For EURUSD, a position of 1.00 lot therefore represents 100,000 euros of exposure. This describes the position’s size, not the amount of money you necessarily deposit to open it.
Smaller forex sizes are commonly described as mini lots and micro lots. A mini lot is 0.10 standard lots, or 10,000 base-currency units. A micro lot is 0.01 standard lots, or 1,000 units. These labels do not mean every instrument uses the same contract size. Before entering an order in MT5, check the symbol’s specification for its contract size, minimum volume and permitted volume increments.
3. Connecting size and pip value
Position size is the total quantity of an instrument in a trade, usually entered as volume in lots on MT5. Pip value is the money gained or lost for each one-pip price movement. For EURUSD, one standard lot has a pip value of USD 10. A 0.10-lot position has a pip value of USD 1, while a 0.01-lot position has a pip value of USD 0.10.
For a currency pair, pip value in the quote currency equals the number of base-currency units multiplied by the pip size. For one standard lot of EURUSD, this is 100,000 × 0.0001 = USD 10 per pip. If your account uses another currency, that value must be converted into your account currency. Pip values are not identical across all pairs and may change with the relevant exchange rates.
4. Worked example: EURUSD
Consider a hypothetical EURUSD buy position of 0.20 lots in a USD-denominated account. Its size is 0.20 × 100,000 = 20,000 euros, and its pip value is 0.20 × USD 10 = USD 2 per pip. Assume the executed opening price is 1.0800 and the executed closing price is 1.0830. The difference of 0.0030 equals 30 pips.
Because this is a buy position and the closing price is higher, the price-based profit is 30 × USD 2 = USD 60. If it instead closed at 1.0770, the 30-pip decline would produce a USD 60 loss. These figures exclude commissions and financing charges. At 0.10 lots, the same movements would produce USD 30 of profit or loss. The price movement stays the same; the position size changes its financial effect.
5. Position size is not margin
Margin is the amount required to support a leveraged position; it is not the position’s full value or a maximum possible loss. Leverage allows a smaller margin amount to support larger market exposure. However, increasing leverage does not change pip value when position size stays unchanged. A 0.20-lot EURUSD position still moves by USD 2 per pip, regardless of the leverage used to support it.
Before placing an order, distinguish between the position’s volume, its value per price movement and the margin required. These answer different questions about exposure and funding. A stop-loss can help manage a position, but it does not guarantee execution at the requested price. CFDs are leveraged products and carry a high risk of loss. In the next lesson, you will learn how bid, ask and the spread affect trading prices.
- Pips measure price movement; lots measure trade quantity.
- One standard forex lot represents 100,000 base-currency units.
- Larger positions increase both potential gains and losses per pip.
- Margin supports a position; it does not cap losses.