Pips, Lots and Leverage Explained
Published by CalendaFX — Trade the Economic Calendar
When you first look at Forex, you meet three words straight away: pips, lots, and leverage. They sound technical, but each one is simple once explained plainly. Here is what they mean and why they matter.
What is a pip?
A pip is the smallest standard move in a currency price. For most pairs, it is a change in the fourth decimal place. If EUR/USD moves from 1.1000 to 1.1001, that is one pip. Pips are simply the unit traders use to measure how far a price has moved — instead of saying “it went up 0.0005,” they say “it went up 5 pips.”
The exception is pairs involving the Japanese yen, where a pip is the second decimal place (for example, USD/JPY moving from 150.00 to 150.01).
What is a lot?
A lot is the size of your trade — how much currency you are buying or selling. Because a single pip is a tiny amount, you need a reasonable trade size for the movement to be worth anything. Lots come in standard sizes:
- Standard lot — 100,000 units of currency
- Mini lot — 10,000 units
- Micro lot — 1,000 units
The bigger your lot size, the more each pip is worth — and the more you gain or lose when the price moves. Beginners usually start with micro lots to keep risk small while learning.
What is leverage?
Leverage lets you control a large position with a small amount of your own money. If a broker offers 30:1 leverage, you can control £30,000 worth of currency with just £1,000. The broker effectively lends you the rest for the duration of the trade.
Leverage is what makes Forex appealing — and dangerous. It multiplies your gains, but it multiplies your losses in exactly the same way.
Why leverage needs respect
Here is the honest truth every beginner needs to hear: leverage is the number one reason new traders blow up their accounts. Because it magnifies losses, a small move against a large leveraged position can wipe out your money quickly. Professional traders use leverage cautiously and keep their risk per trade small — often risking no more than a tiny percentage of their account on any single position.
The bottom line
A pip measures how far a price moves, a lot sets how big your trade is, and leverage lets you control more than your cash alone would allow. Together they determine how much you make or lose. Understand all three before you place a single trade — and treat leverage with the caution it deserves.
This article is for educational purposes only and does not constitute financial advice. Trading carries significant risk, and you should never trade with money you cannot afford to lose. Please read our full Risk Disclaimer.