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Lesson 3: FOREX PIPS AND LOTS

In this lesson we will explain what pips and lots are and how they relate to trading Forex

WHAT IS A PIP?

A pip is the smallest amount of movement a price quote can make. In other words, each tick of the price quote is a pip.

When EUR/USD moves from 1.2786 to 1.2787, for example, it has moved by one pip. You could also call it a point or a tick, but in forex traders’ jargon, pip is the word.

It’s a good idea to measure your profit or loss in pips rather than in the amount you actually lose or earn, since the trader’s performance can only be valued through his success in gathering pips.

For instance, supposing trader A has a beginning capital of 100 USD, and trader B has only 10, it would take trader B ten times as much in terms of pips to achieve the same gain that was acquired by trader A in absolute dollar terms. In terms of their prowess in the market, however, if trader B were to make just 1/10 of what trader A makes, they’d still be equal, due to the the difference between their starting capital. This same logic can be utilized when assessing one’s own prowess, and if a diary is kept, it’s always better to note the loss or profit in pips, rather than cash, so as to keep a better track of performance.

It must also be remembered that one pip in the currency pair that is traded may not be the same amount in the trader’s base currency, that is, the currency with which he funds his account. For instance, if your currency is the British Pound, and you’re trading the EUR/USD, one pip movement in the currency pair would be a different amount in your base currency, depending on the quotes.

WHAT IS A LOT?

Another important term in trading forex is the lot. In Forex trading a lot is the smallest amount of currency you can trade at a particular level of leverage. There are three common sizes of lot in Forex trading – standard lots, mini lots and micro lots.

A standard lot is 100,000 units of currency. A mini lot is 10,000 units and a micro lot is 1000 units. In recent years other lot sizes have emerged such as nano lots which are 100 units .

Among today’s forex brokers, there are those who allow traders to enter bids without the use of lots, and the inexperienced trader may seek them before gaining enough confidence to start trading with a higher volume.

KEY POINTS

  • A pip is the smallest amount a Forex quote can move by
  • If EUR/USD moves from 1.2786 to 1.2787 it has increased by 1 pip
  • It’s a good idea to count wins and losses in pips rather than dollar amounts
  • A lot is a particular amount of a currency that can be bought or sold
  • A standard lot is 100,000 units, mini lot is 10,000, a micro lot is 1,000 and a nano lot is 100

FURTHER READING

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