Pips and lot sizes

The pip

A pip is the smallest conventional unit of price movement for a currency pair. For most pairs it is the fourth decimal place, 0.0001, so a move from 1.1600 to 1.1650 is 50 pips. For pairs where the yen is the quote currency it is the second decimal place, 0.01, so a move from 157.50 to 158.00 is also 50 pips. Brokers quote one more digit than the pip, the pipette or point, which is a tenth of a pip and is what a spread of 0.7 pips refers to.

Gold and silver do not have a universal convention. Most brokers treat 0.01 dollars as a pip on gold and 0.001 on silver, but some count a full cent, and the platform's specification for the instrument is the only reliable guide.

The lot

A lot is the standard size of a position. In forex a standard lot is 100,000 units of the base currency: one lot of EUR/USD is 100,000 euros. A mini lot is 10,000 units and a micro lot is 1,000, and brokers let you trade in fractions, so a position of 0.35 lots is 35,000 units. For gold a standard lot is 100 troy ounces and for silver 5,000 ounces.

The lot size matters because it decides what a pip is worth. One pip on a standard lot is the pip size multiplied by 100,000, which is 10 units of the quote currency: 10 dollars on EUR/USD, 1,000 yen on USD/JPY, 10 pounds on EUR/GBP. On a mini lot it is a tenth of that and on a micro lot a hundredth. A 50 pip move on one standard lot of EUR/USD is 500 dollars; on a micro lot it is 5 dollars.

Converting into your account currency

The pip value comes out in the quote currency of the pair, which is not always the currency your account is held in. A trader with a euro account trading USD/JPY has a pip value in yen that has to be converted to euros at the current rate. Platforms do this automatically when they show the profit and loss, and the pip value calculator does it for any pair and account currency. It matters because a trader sizing a position by risk needs the pip value in the currency the risk is measured in.

Why the two together decide everything

Every figure that matters on a trade is pips multiplied by pip value. The cost of the spread is the spread in pips times the pip value. The risk on a stop loss is the stop distance in pips times the pip value. The profit target is the same. Once the pip value for the position size is known, the whole trade can be expressed in money before it is placed, which is what the position sizing article turns into a method.