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Lesson 03 of 8 · Forex Foundations

Pips, Lots and Contract Size

20 min4 topics

Topic 1 of 4

By the end of this lesson

  • Convert a price move into pips on any pair, including JPY pairs
  • State what a standard, mini and micro lot are worth
  • Calculate the value of one pip on a given position

Before this lesson

Three units turn a price move into an amount of money: the pip measures the move, the lot measures the position, and contract size connects them. Get these three right and position sizing stops being guesswork.

What a pip is, and the JPY exception

A pip is the standard smallest move in a pair. For almost every pair it is 0.0001 — the fourth decimal place. EUR/USD moving from 1.0800 to 1.0801 is one pip.

Pairs quoted against the Japanese yen are the exception. They carry two decimal places instead of four, so a pip is 0.01. USD/JPY moving from 150.00 to 150.01 is one pip.

PairOne pipExample moveThat is
EUR/USD0.00011.0800 to 1.085050 pips
GBP/USD0.00011.2700 to 1.267525 pips
USD/JPY0.01150.00 to 150.4040 pips
EUR/JPY0.01162.00 to 161.1090 pips

Note

Most platforms show one extra digit — 1.08003 rather than 1.0800. That last digit is a pipette, a tenth of a pip. It exists so brokers can quote finer spreads. Do not read 1.08003 as three pips above 1.0800; it is three tenths of one.

Lot sizes and contract size

Position size is quoted in lots. A lot is a fixed number of units of the base currency, and that number is the contract size. For forex pairs it is 100,000 units for one standard lot.

LotUnits of base currencyUsually written
Standard100,0001.00
Mini10,0000.10
Micro1,0000.01

Most brokers accept 0.01 as the smallest increment, so a micro lot is the floor. That floor matters more than it sounds: on a small account it can be the reason a sensible stop distance is unreachable, which is a problem Lesson 8 comes back to.

Working out pip value

Pip value is what one pip of movement is worth on your position. It is the piece that makes a stop distance into an amount of money you can actually decide about.

Pip value = contract size x lots x pip size

What each variable means:

  • contract size — 100,000 for a standard forex lot
  • lots — Your position size, e.g. 0.10
  • pip size — 0.0001, or 0.01 on a JPY pair

For EUR/USD, one standard lot: 100,000 x 1 x 0.0001 = 10 dollars a pip. The answer comes out in the quote currency, which for EUR/USD is already dollars.

Pip value scales exactly with lot size
Position on EUR/USDOne pip is worth
1.00 (standard)$10.00
0.10 (mini)$1.00
0.01 (micro)$0.10

Caution

Pip value is always in the quote currency, not the base. On EUR/USD that is dollars, which is why the figures above are clean. On a pair quoted in something else, the answer arrives in that currency and has to be converted before it means anything to your account.

USD/JPY is the common case. One standard lot gives 100,000 x 1 x 0.01 = 1,000 yen a pip. Converting at a USD/JPY rate of 150 gives about $6.67 a pip — noticeably less than the $10 the same size buys on EUR/USD.

Why the same move is not the same money on every pair

A 25-pip move sounds like a fixed quantity. It is not. On one standard lot of GBP/USD it is $250. On one standard lot of USD/JPY at 150 it is about $167. Same pips, same position size, two thirds of the money.

Two things vary and both have to be checked per pair: the pip value, which depends on the quote currency and its exchange rate, and how far the pair typically moves in a day, which decides whether 25 pips is a scratch or a whole session.

  • Never carry a pip value in your head between pairs. It is correct only for the pair and the rate you worked it out on.
  • Compare risk in money, not in pips. A 40-pip stop on one pair and a 40-pip stop on another are not the same bet.
  • Recheck the value when the rate moves a lot. A pip on a JPY pair is worth a different amount at 130 than at 160.

Try it now

Rather than doing this by hand each time, put the pair, the lot size and the number of pips into the calculator and read the value back.

Pip Calculator

Key takeaways

  • A pip is 0.0001 on most pairs and 0.01 on yen pairs. The extra digit some platforms show is a tenth of a pip.
  • A standard lot is 100,000 units of the base currency; a mini is 10,000 and a micro is 1,000.
  • Pip value = contract size x lots x pip size, and the answer is in the QUOTE currency.
  • On EUR/USD one standard lot is $10 a pip, a mini $1, a micro $0.10 — and those figures do not carry to another pair.

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