How Forex Trading Works: Pips, Lots and Leverage Explained

The foreign-exchange market is where currencies are traded against each other, and it is the largest financial market in the world by turnover. To follow forex news or to size a trade, you need three ideas: pips (how price moves are measured), lots (how trade size is measured) and leverage (how much exposure you control with a given deposit). This guide explains each one with worked examples and live values.

How a currency pair is quoted

Currencies trade in pairs. In EUR/USD 1.1400, the euro is the base currency and the US dollar is the quote currency: one euro costs 1.14 dollars. If EUR/USD rises, the euro is strengthening against the dollar.

Every quote has two prices. The bid is what the market will pay you if you sell; the ask is what you pay to buy. The gap between them is the spread, and it is the main trading cost on most forex accounts.

What is a pip?

A pip is the standard unit for measuring a price move:

• For most pairs a pip is 0.0001, the fourth decimal place. EUR/USD moving from 1.1400 to 1.1425 is a 25-pip move.
• For pairs quoted in Japanese yen a pip is 0.01, the second decimal place. USD/JPY moving from 158.00 to 158.40 is a 40-pip move.

Many brokers quote one extra decimal. That fifth digit (or third for yen pairs) is called a pipette, or a tenth of a pip.

Gold (XAU/USD) and other metals do not follow one standard: brokers define a “pip” on gold differently, and a standard lot is often 100 ounces. Always check your broker’s contract specification.

What is a lot?

Lot size	Units of base currency
Standard lot	100,000
Mini lot	10,000
Micro lot	1,000

One standard lot of EUR/USD therefore means buying or selling €100,000.

How much is one pip worth?

Pip value depends on the lot size and on the quote currency:

• When the US dollar is the quote currency (EUR/USD, GBP/USD, AUD/USD), one pip on a standard lot is always $10: 0.0001 × 100,000.
• When the dollar is the base currency (USD/JPY, USD/CAD, USD/CHF), the pip value is fixed in the other currency and changes in dollar terms with the rate. For USD/JPY at 158: 0.01 × 100,000 = ¥1,000, which is about $6.33.

Here are the values at the latest rates:

Updated 13:43 UTC · Pip values in US dollars at the latest rate; standard 100,000 · mini 10,000 · micro 1,000 units

A worked trade

You buy one mini lot of EUR/USD at 1.1400 and sell at 1.1450. That is a 50-pip gain, and at $1 per pip on a mini lot your profit is $50 before costs. Had the price fallen to 1.1350 instead, you would have lost $50. The spread is paid on every trade, so a pair with a 1.5-pip spread starts each mini-lot trade $1.50 behind.

Leverage and margin

Forex accounts usually let you control a position much larger than your deposit. The deposit set aside to open the trade is the margin:

Margin = position value ÷ leverage

One standard lot of EUR/USD at 1.1400 is worth $114,000. With 30:1 leverage you need $3,800 of margin; with 50:1, $2,280.

Leverage works in both directions. A 1% move against that position costs $1,140, which is 30% of the $3,800 margin. A move of a little over 3% would wipe out the margin entirely. This is why most retail traders who use high leverage lose money: brokers regulated in the EU and UK must disclose the share of their retail accounts that lose money, and those figures are typically well above half.

Leverage limits for retail traders

• European Union and United Kingdom: regulators cap retail leverage at 30:1 on major currency pairs and lower on others.
• United States: the limit is 50:1 on major pairs and 20:1 on others.
• India: residents may trade currency derivatives only on recognised Indian exchanges such as NSE and BSE. The Reserve Bank of India publishes an Alert List of unauthorised forex trading platforms, and trading through them is not permitted.

Sizing a position sensibly

Professional traders usually start from risk, not from the size they want to trade. Decide the most you are willing to lose on a trade (often 1% of the account), set a stop-loss, and work backwards to the position size. Our position size calculator does this for you, and live rates for major pairs and a cross-rate table are on our Forex page.

Frequently asked questions

Why are yen pairs quoted to two decimals?

One yen is worth much less than one dollar or euro, so rates like 158.00 are large numbers. A pip of 0.01 on USD/JPY is roughly the same proportional move as 0.0001 on EUR/USD.

Is higher leverage better?

No. Leverage does not change how much a currency moves; it only changes how much of your deposit each move is worth. Higher leverage means a smaller adverse move can close out your position.

What moves currency rates?

Mostly interest-rate expectations, inflation and growth data, central-bank statements and risk sentiment. Our economic calendar lists the scheduled releases that tend to move the major pairs.