Lots and pip value

A pip tells you how far price moved. Pip value tells you what that move was worth in money. Combine the two with a stop distance and you have a position size, which is the whole point of the arithmetic.

Lot sizes

Positions are measured in lots, where a lot is a fixed number of units of the base currency:

Platforms take the size as a decimal fraction of a standard lot, so "0.03" is three micro lots, or 3,000 units. Most beginners should be trading in micro lots (0.01 to 0.10) for a long time.

Pip value in the quote currency

The pip value of a position, in the quote currency, is:

pip value (quote currency) = pip size × units

For a standard lot of EUR/USD: 0.0001 × 100,000 = 10 USD per pip.

For a micro lot of EUR/USD: 0.0001 × 1,000 = 0.10 USD per pip.

For a standard lot of USD/JPY: 0.01 × 100,000 = 1,000 JPY per pip.

The pip value is always in the quote currency because that is the currency the price is measured in. That is the first thing most people forget.

Converting to your account currency

Your profit and loss is booked in your account currency (say USD). There are three cases:

Case 1: the quote currency is your account currency. Nothing to convert. A mini lot of EUR/USD in a USD account is $1.00 per pip, done. This is why USD-quoted pairs are the easiest to size for USD accounts.

Case 2: the base currency is your account currency. Divide by the current price of the pair.

pip value (account) = (pip size × units) ÷ current price

A mini lot of USD/JPY at 150.20 in a USD account: (0.01 × 10,000) ÷ 150.20 = 100 ÷ 150.20 = $0.666 per pip.

A mini lot of USD/CHF at 0.8800 in a USD account: (0.0001 × 10,000) ÷ 0.8800 = 1 ÷ 0.8800 = $1.136 per pip.

Case 3: neither currency is your account currency. Convert the quote-currency pip value using the exchange rate between the quote currency and your account currency.

A mini lot of EUR/GBP in a USD account, with GBP/USD at 1.2700: pip value is 1.00 GBP, and 1.00 GBP × 1.2700 = $1.27 per pip.

A mini lot of EUR/JPY in a USD account, with USD/JPY at 150.20: pip value is 100 JPY, and 100 ÷ 150.20 = $0.666 per pip.

Note the last two rows: a EUR account trading EUR/USD is Case 2 (base is the account currency), so the $1.00 pip value becomes 1.00 ÷ 1.0850 = €0.922.

The pip value calculator does all three cases. Use it, but do the calculation by hand at least once per pair so you know what the tool is doing.

Key idea: Pip value = pip size × units, in the quote currency. Then convert to your account currency: no conversion if quote = account, divide by the price if base = account, otherwise multiply by the quote-to-account rate.

From pip value to position size

This is where the risk management course and this one meet. The sizing chain is:

1. Dollars at risk = account × risk %.
2. Stop distance in pips (from the chart, not from the budget).
3. Affordable pip value = dollars at risk ÷ stop in pips.
4. Lots = affordable pip value ÷ pip value per lot. Round down.

Example. Account $4,000, risk 1% = $40. GBP/USD, stop 35 pips. Pip value per micro lot in a USD account = $0.10.

Affordable pip value = 40 ÷ 35 = $1.143 per pip. Micro lots = 1.143 ÷ 0.10 = 11.4, round down to 11. Actual risk = 11 × 0.10 × 35 = $38.50.

Example with conversion. Same account and risk, USD/JPY at 150.20, stop 40 pips. Pip value per micro lot = (0.01 × 1,000) ÷ 150.20 = $0.0666.

Affordable pip value = 40 ÷ 40 = $1.00 per pip. Micro lots = 1.00 ÷ 0.0666 = 15.0. Take 15. Actual risk = 15 × 0.0666 × 40 = $39.96.

Notional and the leverage you are really using

Position size in lots also tells you the notional exposure. 11 micro lots of GBP/USD at 1.2700 is 11,000 GBP × 1.2700 = $13,970 of exposure on a $4,000 account, so about 3.5:1. That number, not the 30:1 or 500:1 your broker advertises, is your actual leverage. Module 4 turns it into margin.

Try it: For a $2,500 USD account risking 1%, size the following and round down to whole micro lots: (a) EUR/USD with a 20-pip stop; (b) USD/CAD at 1.3600 with a 25-pip stop; (c) EUR/JPY at 162.97 with USD/JPY at 150.20 and a 60-pip stop. (Answers: 12, 13 and 6 micro lots.) Check on the pip value and position size calculators.

Recap

• A standard lot is 100,000 units of base, a mini 10,000, a micro 1,000; platforms express size as a fraction of a standard lot.
• Pip value = pip size × units, always in the quote currency first.
• Convert to account currency: none if quote = account, divide by price if base = account, otherwise use the quote-to-account rate.
• Size = (dollars at risk ÷ stop in pips) ÷ pip value per lot, rounded down.
• The notional exposure that results is your real leverage, whatever the broker advertises.