What is a Pip

Here is where we’re going to do a little math. Just a little bit.

You’ve probably heard of the terms “pips,” “points“, “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.

 The unit of measurement to express the change in value between two currencies is called a “pip.”

If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.

A pip is usually the last decimal place of a price quote.

Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.

 

What is Lot

A “lot” is a unit measuring a transaction amount.

When you place orders on your trading platform, orders are placed in sizes quoted in lots.

It’s like an egg carton (or egg box in British English). When you buy eggs, you usually buy a carton (or box). One carton includes 12 eggs.

The standard size for a lot is 100,000 units of currency, and now, there are also mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units.

What is Margin

When trading forex, you are only required to put up a small amount of capital to open and maintain a new position.

This capital is known as the margin.

For example, if you want to buy $100,000 worth of USD/JPY, you don’t need to put up the full amount, you only need to put up a portion, like $3,000. The actual amount depends on your forex broker or CFD provider.

Margin can be thought of as a good faith deposit or collateral that’s needed to open a position and keep it open.

It is a “good faith” assurance that you can afford to hold the trade until it is closed.

Margin is NOT a fee or a transaction cost.

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