Definition
What is a Pip?
A pip is a unit of measurement used to represent the smallest change in value between two currencies. If the decimal point on the EUR/USD moves from 1.1055 to 1.1056, the difference of 0.0001 represents an increase of one pip. Pips are typically calculated from the fourth decimal place for most currency pairs, with the exception of the Japanese yen, where pips are calculated from the second decimal place. The following are examples of currency pair quotes shown in pips:
GBP/CAD = 1.65723
USD/JPY = 110.890
EUR/USD = 1.13455
Let’s learn how to count the value of one pip.
We will use the USD/JPY pair as an example. The exchange rate is 110.890.
(0.01 (a pip)/110.890(an exchange rate) X 100,000 (a standard lot) = $9,01 per pip
0.01
A PIP
/
110.890
EXCHANGE RATE
X
100,000
STANDARD LOT
=
$9,01 PER PIP
For your 13 pip trade, you would have earned around $117.13.
Let’s count a pair where the USD is not a base currency. For example, EUR/USD. The exchange rate is 1.13. (0.0001/1) X 100,000 = $10 per pip
(
0.0001
A PIP
/
1
)
X
100,000
STANDARD LOT
=
$10 PER PIP
For your 5 pip trade, you would have earned $50.
What is a Lot?
A lot is a unit of measure used to represent the quantity of currency units traded by a trader. Whenever a trader opens a position and places an order, the order is quoted in lots. A standard lot is equal to 100,000 units of currency, but there are other lot sizes available, including mini lots, micro lots, and nano lots. Mini lots are 10,000 contract units, micro lots are 1,000 contract units, and nano lots are 100 contract units. These smaller lot sizes are particularly useful for new traders who want to trade with less capital and minimize potential losses in the market.
| Lot Name | Number of Units | MT4 Notation | Pip Value $ |
|---|---|---|---|
| Standard | 100,000 | 1 Lot | $10 |
| Mini | 10,000 | 0.1 Lot | $1 |
| Mirco | 1,000 | 0.01 Lot | $0.1 |