Mastering Pips, Lots & Position Sizing: The Foundation of Every Trade
Understanding pips, lots, and position sizing isn't just technical knowledge - it's the foundation that determines whether you'll survive as a trader. These concepts control how much you make or lose on every trade, and mastering them is essential before risking real money.
💡 Why This Matters
A trader who doesn't understand position sizing is like a driver who doesn't know how the accelerator works. You might move forward, but you have no control over your speed - and in trading, speed (position size) directly affects how fast you can crash.
Part 1: Understanding Pips
What is a Pip?
A pip (Percentage in Point or Price Interest Point) is the smallest standardized price movement in Forex. It's how we measure how much a currency pair has moved.
EUR/USD Price Movement
1.1050 → 1.1060
This is a 10 pip increase
The fourth decimal place (5 to 6) moved by 1 digit, but the actual change is 0.0010, which equals 10 pips.
Pip Location by Currency Pair Type
Most Currency Pairs (4 Decimal Places)
1 pip = 0.0001
Examples: EUR/USD, GBP/USD, AUD/USD, USD/CHF
EUR/USD: 1.1050 - the "5" is in the pip position
Japanese Yen Pairs (2 Decimal Places)
1 pip = 0.01
Examples: USD/JPY, EUR/JPY, GBP/JPY
USD/JPY: 150.50 - the "5" is in the pip position
What is a Pipette (Fractional Pip)?
Modern brokers quote prices with an extra decimal place, called a pipette or point. This is 1/10th of a pip.
4-Decimal Quote (Old Style)
EUR/USD: 1.1050
Minimum movement: 1 pip
5-Decimal Quote (Modern)
EUR/USD: 1.10503
The "3" is a pipette (0.1 pips)
📝 Why Pipettes Matter
Pipettes allow for tighter spreads. Instead of a 1-pip spread, you might get a 0.8-pip spread. For high-volume traders and scalpers, this difference adds up significantly over hundreds of trades.
Calculating Pip Movements
📊 Practice Calculations
EUR/USD moved from 1.1050 to 1.1125
Calculation: 1.1125 - 1.1050 = 0.0075
Pips: 0.0075 ÷ 0.0001 = 75 pips
USD/JPY moved from 150.00 to 149.35
Calculation: 150.00 - 149.35 = 0.65
Pips: 0.65 ÷ 0.01 = 65 pips (price fell, so -65 pips)
Part 2: Understanding Lots
What is a Lot?
A lot is the standardized unit of measurement for trade size in Forex. Because currencies move in tiny increments (pips), you need to trade large amounts for movements to be meaningful.
Standard Lot
units of base currency
Pip Value: ~$10 per pip*
50 pips = $500 profit/loss
Mini Lot
units of base currency
Pip Value: ~$1 per pip*
50 pips = $50 profit/loss
Micro Lot
units of base currency
Pip Value: ~$0.10 per pip*
50 pips = $5 profit/loss
Nano Lot
units of base currency
Pip Value: ~$0.01 per pip*
50 pips = $0.50 profit/loss
*Approximate pip values for USD quote currency pairs (e.g., EUR/USD, GBP/USD)
Lot Size Notation
Most brokers display lot sizes using decimal notation:
Part 3: Calculating Pip Value
The Formula
Pip value varies based on the currency pair and your lot size:
Pip Value = (One Pip ÷ Exchange Rate) × Lot Size
One Pip = 0.0001 for most pairs, 0.01 for JPY pairs
Detailed Examples
📊 Example 1: EUR/USD (Quote currency is USD)
EUR/USD = 1.1000, Trading 1 Standard Lot (100,000)
Pip Value = (0.0001 ÷ 1.1000) × 100,000
Pip Value = 0.0000909 × 100,000
Pip Value = $9.09 per pip
For USD quote currency pairs, the pip value is approximately $10 per standard lot (varies slightly with exchange rate)
📊 Example 2: USD/JPY (Quote currency is JPY)
USD/JPY = 150.00, Trading 1 Standard Lot (100,000)
Pip Value in JPY = (0.01 ÷ 150.00) × 100,000 = 6.67 JPY per pip
Convert to USD: 6.67 ÷ 150.00 = $6.67 per pip
JPY pairs have slightly different pip values that fluctuate with the exchange rate
📊 Example 3: GBP/USD with Different Lot Sizes
GBP/USD = 1.2500
| Lot Size | Notation | Pip Value |
|---|---|---|
| 1 Standard | 1.00 | $8.00 per pip |
| 1 Mini | 0.10 | $0.80 per pip |
| 1 Micro | 0.01 | $0.08 per pip |
| 5 Micro | 0.05 | $0.40 per pip |
💡 Quick Pip Value Reference
For pairs where USD is the quote currency (EUR/USD, GBP/USD, AUD/USD):
- 1 Standard Lot ≈ $10 per pip
- 1 Mini Lot ≈ $1 per pip
- 1 Micro Lot ≈ $0.10 per pip
This approximation works for quick mental calculations.
Part 4: Calculating Profit and Loss
Profit/Loss = Number of Pips × Pip Value
💰 Complete Trade Example
Setup: You buy 0.50 lots of EUR/USD at 1.1000
Exit: Price rises to 1.1085, you close the trade
Step 1: Calculate pip movement
1.1085 - 1.1000 = 0.0085 = 85 pips
Step 2: Determine pip value
0.50 lots = 50,000 units
Pip value ≈ $5 per pip (half of standard lot)
Step 3: Calculate profit
85 pips × $5 = $425 profit
📉 Loss Example
Setup: You buy 0.10 lots of GBP/USD at 1.2550
Exit: Price drops to 1.2480, you close the trade
Step 1: Calculate pip movement
1.2480 - 1.2550 = -0.0070 = -70 pips
Step 2: Determine pip value
0.10 lots = mini lot = approximately $1 per pip
Step 3: Calculate loss
70 pips × $1 = $70 loss
Part 5: Position Sizing - The Key to Survival
Position sizing is how you determine the lot size for each trade based on your account size and risk tolerance. This is the #1 skill that separates successful traders from blown accounts.
🛡️ The 1-2% Rule
Never risk more than 1-2% of your account on any single trade.
Professional traders often risk only 0.5-1% per trade.
Example: $5,000 account → Maximum risk per trade = $50-$100
Position Size Formula
Position Size (lots) = Risk Amount ÷ (Stop Loss in Pips × Pip Value per Lot)
📐 Position Sizing Example
Your Details:
- Account Balance: $10,000
- Risk Per Trade: 1% = $100
- Trade: EUR/USD
- Stop Loss: 50 pips
Step 1: Calculate maximum risk in dollars
$10,000 × 1% = $100 maximum risk
Step 2: Calculate pip value needed
$100 ÷ 50 pips = $2 per pip
Step 3: Convert to lot size
$2 per pip ÷ $10 per pip (standard lot) = 0.20 lots
Result: You should trade 0.20 lots (2 mini lots)
Position Sizing Quick Reference
For EUR/USD with a 50-pip stop loss:
Common Mistakes to Avoid
⚠️ Position Sizing Mistakes That Kill Accounts
- Trading fixed lot sizes: Trading 1 lot regardless of stop loss size is reckless. A 20-pip stop vs 100-pip stop should have different lot sizes.
- Revenge trading: After a loss, increasing position size to "win it back" usually leads to bigger losses.
- Risking too much: Even a 5% risk per trade means 10 losses = 50% account gone. That's hard to recover from.
- Ignoring correlation: If you have 3 trades on correlated pairs (EUR/USD, GBP/USD, AUD/USD), you effectively have 3x the risk.
- Not adjusting for volatility: In volatile markets, use smaller position sizes. Your "normal" 50-pip stop might get hit by a 100-pip spike.
✅ Best Practices for Position Sizing
- Calculate position size BEFORE every trade - never skip this step
- Use a position size calculator (most brokers provide one)
- Start with 0.5% risk while learning, move to 1% once consistently profitable
- Reduce position size during losing streaks
- Keep a trading journal to track your risk management
Key Takeaways
- A pip is 0.0001 for most pairs and 0.01 for JPY pairs - it's how we measure price movement
- Standard lot = 100,000 units (~$10/pip), Mini = 10,000 (~$1/pip), Micro = 1,000 (~$0.10/pip)
- Pip value varies by lot size and currency pair - always calculate before trading
- NEVER risk more than 1-2% of your account on a single trade - this is non-negotiable
- Position size should be calculated based on your stop loss distance, not a fixed amount
- Start with micro lots while learning - a 100-pip loss only costs $10 instead of $1,000
- Proper position sizing is the difference between long-term survival and blowing your account