What is a pip?
A pip is the smallest standard unit used to measure movement in a currency pair. On most pairs, it's the fourth decimal place. If EUR/USD moves from 1.0850 to 1.0851, that's a one-pip move. On pairs that include the Japanese yen, prices are quoted to two decimal places, so a pip is the second decimal — USD/JPY moving from 150.20 to 150.21 is also a one-pip move.
Pips give you a common language for distance. A stop-loss of 20 pips means the same on any pair, even though the price levels look completely different.
Fractional pips
Most modern brokers now quote an extra digit — the fractional pip, or pipette. On EUR/USD you'll see prices like 1.08505. The final 5 is a tenth of a pip. Fractional pips matter for very tight spreads and precise stop placement, but you don't need to think about them when planning a trade. Pips are still the unit that matters.
What is a lot?
A lot is the unit of position size. There are three standard sizes:
- Standard lot — 100,000 units of the base currency
- Mini lot — 10,000 units
- Micro lot — 1,000 units
So one standard lot of EUR/USD is a position worth roughly 100,000 euros in notional value. A mini lot is a tenth of that; a micro lot a hundredth. Most retail brokers let you trade fractional lots (e.g. 0.37 lots) so you can size precisely to your risk.
Pip value
The value of one pip depends on lot size and pair. On most USD-quoted pairs (like EUR/USD), one pip is worth roughly £8 per standard lot, £0.80 per mini lot, £0.08 per micro lot in a sterling account (the underlying $10 per standard lot converted at current rates). On JPY pairs the maths is slightly different but the principle is the same — smaller lot, smaller pip value.
Position size
Position size is chosen from these building blocks based on your risk, not the other way round. The correct question is never 'how big a position can I open?' It's 'what size makes my stop-loss equal to the amount I'm willing to risk on this trade?'
A quick example. £10,000 account, 1% risk per trade = £100 risk. A 25-pip stop on EUR/USD at about £8 per pip per standard lot means you need £100 ÷ (25 × £8) ≈ 0.5 lots. That's how professionals decide size — every time.
What is leverage?
Leverage lets you control a larger notional position with a smaller amount of your own money. If your broker offers 30:1 leverage, you can hold a £30,000 position with £1,000 of your own funds set aside as margin. The other £29,000 is effectively borrowed from the broker for as long as the position is open.
Leverage is a feature of the account, not a decision you make on each trade. What you actually control is position size — and that's what determines your real exposure.
Why leverage cuts both ways
Leverage magnifies percentage moves. A 1% move on a £30,000 position is £300, whether you funded that position with £30,000 of your own money or £1,000 plus leverage. In one case £300 is a 1% move on your capital. In the other, it's a 30% move.
That's why leverage increases both profit potential and risk in exactly the same proportion. It doesn't create edge; it amplifies what's already there — including mistakes.
Common misconceptions
The most damaging belief in retail forex is that high leverage means you should take bigger positions. It doesn't. High available leverage just means the broker lets you take bigger positions if you choose to. Professionals ignore the number on the account and size trades using the risk rules from the risk management guide. The available leverage becomes irrelevant.
Another misconception: that using less margin means less risk. Not true. Two traders with the same open position have the same market risk, regardless of what their margin usage looks like. Risk is determined by position size and stop distance, not by how much margin the broker is holding.
Key takeaways
- A pip is the standard unit for measuring price movement (4th decimal on most pairs, 2nd on JPY pairs)
- Lots are the units of position size: standard (100k), mini (10k), micro (1k)
- Position size should be chosen from your risk and stop distance, not from leverage
- Leverage multiplies both gains and losses in exact proportion
- Available leverage is a feature, not a strategy — professionals ignore the number