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Level 1 - Book 1 - Chapter 6

Pips, Points & Lot Sizes

Understanding pips, points, and lot sizes is essential because they determine how much money you gain or lose on every trade.

Estimated Reading Time: 10 - 12 Minutes

Back to Book 1 Overview

Introduction

One of the biggest mistakes beginners make is focusing only on whether the market goes up or down.

Professional traders think differently.

They ask:

How many pips can I make?
How much am I risking?
What lot size should I trade?
Is this trade worth taking?

Understanding pips, points, and lot sizes is essential because they determine how much money you gain or lose on every trade.

Without understanding these concepts, it is impossible to manage risk effectively or build a profitable trading strategy.

What Is a Pip?

A pip stands for Percentage in Point and is the standard unit used to measure price movement in the forex market.

For most currency pairs:

1 Pip = 0.0001

Example:

EUR/USD moves from

1.1800

1.1801

That is 1 pip.

If it moves to

1.1815

that’s 15 pips.

Japanese Yen Exception

Currency pairs involving the Japanese Yen use two decimal places.

Example:

USD/JPY

145.50

145.51

equals

1 pip

What Is a Point?

Modern brokers usually display an extra decimal place.

Instead of

1.1800

they show

1.18005

That final decimal is called a point (or pipette).

Example:

Price moves

1.18005

1.18015

= 10 points = 1 pip

Therefore:

10 Points = 1 Pip
100 Points = 10 Pips

Many MT4 and MT5 platforms measure stop losses and take profits in points, so it’s important to know the difference.

Understanding Lot Sizes

A lot is the amount of currency you trade.

Different lot sizes represent different trade volumes.

Lot Type	Units
Standard Lot	100,000
Mini Lot	10,000
Micro Lot	1,000
Nano Lot	100

Most beginners start with Micro Lots because they reduce risk while learning.

Why Lot Size Matters

Imagine EUR/USD moves 100 pips.

Different lot sizes produce different profits or losses.

Lot Size	Approximate Value per Pip
Standard	$10
Mini	$1
Micro	$0.10
Nano	$0.01

A 100-pip move would approximately equal:

Standard Lot ≈ $1,000
Mini Lot ≈ $100
Micro Lot ≈ $10
Nano Lot ≈ $1

These values vary slightly depending on the currency pair and account currency, but they provide a useful illustration.

Why Beginners Blow Their Accounts

Many beginners think:

“Bigger lot size means bigger profits.”

This is true.

But it also means:

Bigger losses.

For example:

A trader with a $500 account opens a 1 Standard Lot position.

A market movement of only 50 pips against them could result in a loss of around $500, effectively wiping out the account.

Professional traders choose lot sizes based on risk—not emotion.

Position Sizing

Professional traders decide how much to risk first, then calculate the appropriate lot size.

Example:

Account Balance

$2,000

Maximum Risk

Maximum Loss

$40

If the stop loss is 40 pips, the lot size should be selected so that a 40-pip loss equals about $40.

This is known as position sizing, and it is one of the most important skills in trading.

Common Beginner Mistakes

❌ Trading oversized positions

❌ Ignoring stop-loss distance

❌ Chasing profits with larger lot sizes

❌ Confusing pips with points

❌ Believing leverage alone determines profits

Key Takeaways

✅ A pip measures price movement.

✅ Most forex pairs use four decimal places.

✅ JPY pairs use two decimal places for pips.

✅ A point is one-tenth of a pip on five-decimal pricing.

✅ Lot size determines trade volume.

✅ Proper position sizing is essential for long-term success.

Frequently Asked Questions

What is a pip in Forex?

A pip is the standard unit used to measure price movement in the forex market. For most currency pairs, one pip equals 0.0001.

What is the difference between a pip and a point?

On most modern trading platforms, 10 points equal 1 pip. Points represent the smallest quoted price movement.

Which lot size should beginners use?

Most beginners should start with Micro Lots (0.01) to keep risk low while learning.

Does a bigger lot size mean more profit?

Yes, but it also means greater potential losses. Lot size should always be based on your risk management plan.

Why is position sizing important?

Position sizing helps ensure that each trade risks only a small percentage of your account, making your trading more consistent and sustainable.

Continue Your Journey

Other Learning Lints:

Automation Insight

Every professional Expert Advisor (EA) calculates position size before opening a trade. Instead of using a fixed lot size, advanced systems determine the lot based on account balance, stop-loss distance, and the percentage of capital the trader is willing to risk.