What are pips and lots?
Pips and lots are an important part of any forex trade. You will need to understand both well before even thinking about entering the market for the first time. So, what exactly are they?
Percentage in point (Pip)
A pip is the unit of measurement used to register the change in price between two currencies. It is equivalent to one basis point or one-hundredth of a percent.
In most forex pairs, the pip is the fourth decimal place of a price quote. If, for example, the price of USDCAD was to move from 1.41065 to 1.41075, this would be a change of 0.0001 or 1 pip.
This is true for most pairs, except those that feature the Japanese yen as a quote currency. In these pairs, the pip is the second decimal place of a price quote. Taking USDJPY as an example, a 1 pip increase in price would see the pair move from 106.982 to 106.992.
And what about the fifth decimal place (or third in JPY pairs)? Well, this is known as a fractional pip or pipette and is equal to a tenth of a pip.
What is a lot in forex?
A lot is often used in forex to quantify currency units.
A standard forex lot, for example, is equal to 100,000 units of currency. There are also other lot sizes like mini and micro lots, which equal 10,000 and 1,000 units of currency respectively.
Not all dealers display trade size in lots, however, opting instead to show the amount in actual currency units, as we do at Trading.com.
How does trade size affect pip value?
It’s important to know the value of 1 pip for each currency pair you plan to trade. This can be worked out using a simple calculation:
Pip value = (1 pip / exchange rate) x trade size
Say you wanted to trade 10,000 units of USDCAD at a conversion rate of 1.41065. How much would each pip of movement be worth?
Pip value = (0.0001 / 1.41065) x 10,000 = 0.7
In this example, each pip would be worth 70 cents. The formula provides pip value in the base currency of the pair. It’s a little different when the dollar is not quoted first in a pair.
Let’s say you were trading 100,000 units of EURUSD at a conversion rate of 1.07952.
Pip value = (0.0001 / 1.07952) x 100,000 = 9.26 x 1.07952 = 10
To get the pip value in USD, you need to multiply the result by the exchange rate. In this case, each pip would be worth 10 dollars.