What are pips and lots?

What are pips and lots?

From the traders’ talk, you probably heard such words as pip and lot. These are the two the most essential things you need to know before trading in Forex market. Without them, you simply won’t be able to define the size of your position and calculate your potential profits and losses. So, let us sort it out before your pockets got drained.

On Forex market the value of a currency is given in pips. Pip is an acronym of “Percentage in Point”. It represents the smallest change an exchange rate can make. Pip is the smallest amount by which a currency quote can change. It is the last decimal of a price/quotation. For example, for EUR/USD a pip is the fourth decimal place – $0.0001; for currency pairs including the Japanese yen like USD/JPY, it is the second decimal place ($0.01).  If EUR/USD changed from 1.0800 to 1.0805, this would be a change of 5 pips. If USD/JPY changed from 120.00 to 120.03, this would be a change of 3 pips.

Exchange rates are usually quoted to 5 figures. The first three digits of the quote are called the big figure.

Note that some Forex brokers also count the 5th and the 3rd decimal places respectively. They are called “pipettes” and make the spread calculation more flexible.

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