When you’re new to forex trading, the terms can sound like a foreign language — “What’s a pip?” “What are lots?” “How does leverage work?”
Don’t worry — once you understand these three building blocks, everything else starts to make sense. This guide will break them down in a clear, friendly way, with examples that make it stick.
📌 1. What Is a Pip in Forex?
🔍 Definition:
A pip (short for “percentage in point”) is the smallest price move in the forex market. It shows how much the price of a currency pair changes.
For most currency pairs, 1 pip = 0.0001
(That’s four decimal places.)
Example:
If EUR/USD moves from 1.1000 to 1.1005, it moved 5 pips.
🧠 But What About JPY Pairs?
Currency pairs with the Japanese Yen (like USD/JPY) are a bit different.
For them, 1 pip = 0.01 (That’s two decimal places.)
Example:
If USD/JPY goes from 145.60 to 145.90, that’s 30 pips.
💰 2. What Is a Lot in Forex?
You can’t trade 1 dollar or 1 euro in forex. Instead, you trade in lots — standardized sizes of trades.
📦 Lot Sizes:
| Lot Type | Units | Value of 1 Pip |
|---|---|---|
| Standard Lot | 100,000 | ~$10 per pip |
| Mini Lot | 10,000 | ~$1 per pip |
| Micro Lot | 1,000 | ~$0.10 per pip |
| Nano Lot | 100 | ~$0.01 per pip |
Example:
If you’re trading a mini lot (10,000 units) and the trade moves 10 pips, you make or lose $10 (because 1 pip = $1 in this case).
💡 Why Lot Size Matters:
- Bigger lots = bigger profits (and bigger risks!)
- Choosing the right lot size helps manage your risk and emotions
⚖️ 3. What Is Leverage in Forex?
Leverage lets you control a large trade with a small amount of money.
🔍 Definition:
Leverage is like a loan from your broker that boosts your buying power.
If you have 1:100 leverage, it means:
- For every $1 you have, you can trade $100
📌 Leverage Example:
Let’s say:
- You deposit $100
- Your leverage is 1:100
- You can trade up to $10,000
That sounds amazing, right? Be careful — while leverage increases potential profit, it also increases risk.
⚠️ The Risk of High Leverage
A small market move against you can wipe out your account if you’re overleveraged.
Example:
- You open a trade worth $10,000 with just $100
- If the market moves 10 pips against you ($10 loss per pip), you lose your entire $100
📌 High leverage = high risk. Use it wisely!
🧠 Putting It All Together
Let’s say you’re trading EUR/USD with:
- A $1,000 account
- A mini lot (10,000 units)
- 1:50 leverage
Each pip is worth $1. You decide to risk 20 pips, which equals $20.
That’s 2% of your account — a smart and safe risk.
Now you can see how pips, lots, and leverage work together to build your trade!
✅ Key Takeaways
🔹 Pips measure the price movement.
🔹 Lots determine how much you’re trading.
🔹 Leverage increases your buying power — and risk.
📘 Final Thoughts: Learn the Math, Master the Market
Pips, lots, and leverage might sound boring at first, but they’re the foundation of every trade you’ll ever make. If you don’t understand them, you’re trading blind.
But once you get them?
You’re in control. You can plan your trades, manage your risk, and trade with confidence — just like the pros.
So before chasing strategies and signals, make sure you understand these forex basics. Trust us — your account will thank you later.
