Pip and Lot in Forex Trading: From Basic Definitions to Practical Applications

Why Is It Important to Understand Lot and Pip?

Anyone entering the forex trading world will encounter these two concepts repeatedly. Lot and pip are fundamental foundations for understanding how forex trades work, how to calculate profits, and most importantly, how to manage risk. For professional traders, these are concepts so familiar that they are automatically calculated. However, for beginners, mastering these concepts is key to avoiding confusion in this market.

What is a Pip? Basic Concept

Pip is an abbreviation of “Percentage Interest Point” or “Price Interest Point,” simply the smallest price change unit you will encounter in forex trading. It is also called “price point” and is something every trader needs to monitor closely.

When talking about pip, it is usually calculated to the fourth decimal place of an exchange rate. However, this is not always the case.

The Two Main Cases About Pip

For currency pairs not involving the Japanese Yen (JPY):

Most currency pairs like EUR/USD, GBP/USD, EUR/AUD, or USD/CAD have exchange rates with 5 decimal places. In these cases, pip is defined at the fourth decimal place:

• EUR/USD from 1.1050 → 1.1051: Increase of 1 pip
• GBP/USD from 1.30542 → 1.30543: Increase of 0.1 pip (or called 1 pipette)

For currency pairs involving the Japanese Yen (JPY):

Pairs like USD/JPY or EUR/JPY only have 3 decimal places, so pip is calculated based on the second decimal place:

• USD/JPY from 107.830 → 107.845: Increase of 1.5 pips
• EUR/JPY from 118.721 → 118.720: Decrease of 1 pipette

What is a Point (Pipet)?

If pip is the basic unit, then point or pipet is a smaller unit. The relationship between them is very simple: 1 pip = 10 points. These smaller units exist to help trading platforms be more flexible in calculating spreads and improving market liquidity.

What is a Lot? Standard Trading Volume

If pip measures the magnitude of change, then lot measures the size of the trade.

Lot is a standard measure of the amount of currency used in a trade order. It is the unit that all forex markets use to standardize trade sizes.

Initially, 1 standard lot equals 100,000 units of the base currency. However, the market has evolved to meet the needs of traders with smaller capital, leading to the appearance of different lot types:

• Standard lot: 100,000 units
• Mini lot: 10,000 units
• Micro lot: 1,000 units
• Nano lot: 100 units

The specific lot size offered by a broker can vary depending on the account type and the currency used.

How to Calculate Lot: How Much Money Do You Need?

When the Base Currency Is USD

The basic formula is:

Required Capital = Lot Size × (1 / Leverage)

Example: If you want to open 1 standard lot on the USD/CAD pair with 1:50 leverage:

100,000 × (1/50) = 2,000 USD

This means you only need 2,000 USD to control a position worth 100,000 USD.

When the Base Currency Is Not USD

This process is a bit more complex because you need to convert currencies:

Step 1: Calculate the amount needed in the base currency

• For example, with EUR/JPY (1 standard lot = 100,000 EUR), leverage 1:50:
• 100,000 × (1/50) = 2,000 EUR

Step 2: Convert to USD using the current exchange rate

• If EUR/USD = 1.1086, then 1 EUR = 1.1086 USD
• 2,000 EUR × 1.1086 = 2,217.2 USD

Modern trading platforms usually calculate all this automatically, but understanding the process helps you better manage your capital.

The Relationship Between Pip, Lot, and Profit

This is the most important part: how small pip changes can lead to significant profits?

Calculating the Value of 1 Pip

The absolute value of 1 pip is not fixed and depends on the current exchange rate. To calculate the pip value for a standard lot:

Step 1: Calculate the value of 1 pip in the base currency

For EUR/JPY = 118.721:

• Pip value = 0.01 / 118.721 = 0.0000842311 EUR

(Note: Use 0.01 for pairs with JPY, 0.0001 for pairs without JPY)

Step 2: Convert to USD (if needed)

• 0.0000842311 EUR × 1.1050 (EUR/USD rate) = 0.0000930754 USD

Step 3: Calculate for 1 standard lot (100,000 units)

• 0.0000930754 × 100,000 = 9.31 USD

Thus, 1 pip for EUR/JPY with a standard lot ≈ 9.31 USD.

From Pip to Actual Profit

Now you can calculate your profit:

• If the price increases by 10 pips with 1 lot: 9.31 × 10 = 93.1 USD profit
• If trading 10 lots and the price increases by 5 pips: 9.31 × 5 × 10 = 465.5 USD profit

However, note that pip value constantly changes because it depends on the exchange rate. When the rate fluctuates, pip value also changes accordingly.

Reference Table of Pip Changes on Major Currency Pairs

Things to Remember About Lot and Pip

Point 1: Each pip corresponds to about 1/10,000 change in the currency pair. This is the real power of forex – small changes amplified by large trading volumes.

Point 2: The Japanese Yen (JPY) is an exception. While most pairs calculate pip at the fourth decimal, pairs with JPY calculate at the second decimal.

Point 3: The relationship 1 pip = 10 points is fixed and consistent across all markets.

Point 4: Lot is a standardized volume. 1 standard lot always equals 100,000 units of the base currency, regardless of the broker.

Frequently Asked Questions

Do all forex brokers use the same lot sizes?

No. Although the basic structure is similar, minimum lot sizes, pip values, and regulations can differ between brokers. Some may not offer Nano or Micro lots, especially for less traded currency pairs.

Why choose Mini or Micro lots instead of standard lots?

This helps reduce absolute risk and is more suitable for new investors or those with limited capital. You can profit from small changes without risking too much capital on a single trade.

What is the exact profit calculation formula?

Profit = (Number of pips × Trade size × Pip value) / Currency exchange rate

Is there a difference between pip and point?

Yes. Pip is the standard unit for measuring price change, usually at the fourth decimal (or second with JPY). Point or pipet is a smaller unit, equal to 0.1 pip, used for spread calculations and higher precision.

How do I know how much 1 pip is worth in my trade?

You need to calculate based on lot size, current exchange rate, and currency pair. Most trading platforms display this info directly before you place a trade, but understanding the calculation helps you make better decisions.

Summary

Lot and pip are two inseparable concepts in forex trading. Lot determines how much you trade, pip indicates how much you gain or lose. Mastering both calculations not only helps you manage your capital effectively but also allows you to accurately assess risk before opening a position. From there, you can build a solid trading strategy based on real numbers, not emotions or luck.