Forex Trading Basics: What Is a Lot, What Is a Pip, and How to Calculate Accurately

Those who are new to the forex trading world often feel confused about concepts like lot is what and pip is what. These are two fundamental factors that every trader must understand clearly to manage capital effectively and calculate profits and risks accurately.

This article will explain in detail from lot is what, pip is what in forex, to step-by-step calculation methods so you can trade confidently.

Understanding Lot in Forex Trading

Lot is a standardized unit used to measure trading volume in the forex market. In other words, when you want to trade, you cannot just buy 1,000 USD or 5,000 USD arbitrarily, but must follow the lot sizes regulated by the broker.

One standard lot = 100,000 units of the base currency

For example, when trading EUR/USD, 1 standard lot corresponds to 100,000 EUR.

Different Types of Lots

To accommodate traders with smaller capital, trading platforms have developed various lot sizes:

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

Not all brokers offer all these lot types, especially when trading exotic currency pairs like IDR/TRY.

How to Calculate Lot in Forex

When the Base Currency is USD

Basic formula: Required Capital = Lot Size Value × (1 / Leverage)

Example: You want to buy 1 standard lot of USD/CAD with 1:50 leverage

• Required capital = 100,000 × (1/50) = 2,000 USD

This means, with 2,000 USD margin, you can control a contract value of 100,000 USD.

When the Base Currency is Not USD

When trading other currency pairs like EUR/JPY, an additional conversion step is needed:

Step 1: Calculate margin in the base currency

• Required capital (EUR) = 100,000 × (1/50) = 2,000 EUR

Step 2: Convert to USD according to the exchange rate

• If EUR/USD = 1.1086 → Required capital = 2,000 × 1.1086 = 2,217.2 USD

What is a Pip in Forex

Pip (Percentage In Point) is the smallest price movement unit of a currency pair, also called the “price point”.

To understand pip is what, you need to know:

• For most currency pairs not involving JPY: pip corresponds to the 4th decimal place
• For currency pairs with JPY: pip corresponds to the 2nd decimal place

Specific Examples of Pip

Currency pairs without JPY (5 decimal places):

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

Currency pairs with JPY (3 decimal places):

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

What is a Point (Pipet)?

Point, or pipette, is 1/10 of 1 pip. This unit is used to calculate the spread (the buy/sell price difference) more flexibly.

How to Calculate Pip Value and Convert to Profit

To calculate profit from pip movements, you need to perform 3 steps:

Step 1: Calculate the Value of 1 Pip

Example with EUR/JPY (rate 118.721):

Value of 1 pip = 0.01 / 118.721 = 0.0000842311 EUR

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

Step 2: Convert to USD (If the Base Currency is Not USD)

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

Step 3: Multiply by Standard Lot Size

Value of 1 pip for 1 lot = 0.0000930754 × 100,000 = 9.31 USD

Practical application:

• If the price increases by 10 pips with 1 lot: Profit = 9.31 × 10 = 93 USD
• If trading 10 lots and the price increases by 5 pips: Profit = 9.31 × 5 × 10 = 465 USD

Note: Pip value varies with exchange rates, so it’s not always fixed.

Comparison Table of Pip Movements in Major Currency Pairs

Relationship Between Lot and Pip

Lot and pip are two closely related but different concepts:

• Lot: Determines the volume you trade
• Pip: Indicates the price movement level

For example, if you trade 2 lots and the price increases by 5 pips, your profit will be double that of trading 1 lot with the same movement.

Common Questions When Learning Forex

Why are lot and pip important in forex?

Lot and pip help you manage risk, calculate desired profit, and determine the appropriate position size for your account.

Do different brokers have the same lot and pip values?

No. Each broker may have different minimum lot sizes, pip values, and calculation methods. Always check the specific terms of your broker.

Why should I use Mini Lot or Micro Lot instead of Standard Lot?

Mini/Micro lots allow better risk control, suitable for beginners and traders with small capital. You can practice and build skills without risking too much capital.

How to calculate profit in forex?

Formula: Profit = (Number of Pips × Lot Size × Value per Pip) / Forex Pair Rate

Trading Tips from Experts

1. Understand the concepts clearly: Master pip is what and lot is what as the foundation for effective account management.

2. Pay attention to JPY: Currency pairs involving JPY calculate pip differently, always verify carefully.

3. Remember the ratio: 1 point = 0.1 pip. This is important when calculating spreads.

4. Practice on a demo account: Before real trading, practice with virtual funds to get familiar with pip and lot calculations.

5. Use calculation tools: Most brokers provide calculators to help determine required margin, but understanding the formulas is also essential.

Conclusion

To succeed in forex trading, you must understand pip is what and lot is what, as well as how to calculate them. These two concepts are key to managing capital, controlling risks, and maximizing profits.

Whether you are a beginner or experienced trader, mastering these formulas and principles will help you make smarter trading decisions. Start with Mini Lot, practice calculation skills, and gradually develop your own trading strategy.