Every market has a smallest step that traders talk about. In forex it is the pip, short for "percentage in point". Knowing what one pip is worth in money is the first step to sizing a trade properly.
What a pip is
For most currency pairs a pip is the fourth decimal place: 0.0001. If EURUSD moves from 1.0845 to 1.0855, it has moved 10 pips.
The exception is any pair with the Japanese yen as the second currency. Its prices are quoted with two decimals, so a pip is 0.01: USDJPY moving from 150.00 to 150.50 is 50 pips.
Many platforms also show a fractional pip, a fifth decimal place on most pairs, often called a point. A platform's Specification tells you the digits it quotes, so check before you count.
Lots and contract size
A standard lot is 100,000 units of the first currency in the pair. Smaller sizes are fractions of it: 0.10 lot is 10,000 units and 0.01 lot is 1,000. The pip value depends on how many units you trade.
Pip value, worked through
EURUSD, 1 lot. The profit currency is the dollar.
0.0001 × 100,000 = 10 USD per pip
So a 25-pip move on 1 lot is 250 USD, and on 0.10 lot it is 25 USD.
USDJPY, 1 lot. The profit is first earned in yen:
0.01 × 100,000 = 1,000 JPY per pip
To convert to dollars, divide by the USDJPY price. At 150.00:
1,000 ÷ 150 = about 6.67 USD per pip
The pip value of a yen pair changes a little as the rate moves, which is why a calculator or the symbol's specification is better than memory.
Why it matters
Pip value is what turns a stop-loss distance into money. If your stop is 40 pips away on EURUSD and you trade 0.50 lot, the pip is worth 5 USD and the most you can lose is 40 × 5 = 200 USD (before the spread and slippage).
Work backwards from the amount you accept to lose, and you get the lot size. That is the whole idea of position sizing.
Common mistakes
- Counting pips on a yen pair as if it had four decimals.
- Using 10 USD per pip for every symbol. It is right for EURUSD and a few others quoted against the dollar. For gold, oil and indices the contract size and the pip are set by the broker, so read the Specification.
- Forgetting that the spread is also measured in pips and is paid the moment you enter. See spread, slippage and trading fees.
Practise the arithmetic on a demo account, where one wrong zero costs nothing, until you can say what a pip is worth before you press the button.
Educational content, not investment advice. Trading carries risk, including the loss of capital.