The Basic Terms of Forex Trading
Base vs. Quote Currency
Every currency pair has a "base" currency (the first one) and a "quote" currency (the second one). When you see a price for EUR/USD like 1.1050, think of it like a price tag in a store. The 'item' you are buying or selling is 1 unit of the base currency (EUR), and its 'price' is 1.1050 units of the quote currency (USD). So, 1 Euro costs 1.1050 US Dollars.
Bid, Ask, and Spread
You'll always see two prices for a currency pair. The 'Bid' is the price your broker will buy the base currency from you. The 'Ask' is the price your broker will sell the base currency to you. The Ask price is always slightly higher than the Bid price. This difference is the Spread.
Why spreads exist: Think of the broker like a currency exchange booth at an airport. They buy from you at a lower price (Bid) and sell to you at a higher price (Ask)—the difference is their profit for providing the service. This is how most brokers make money instead of charging commissions. When you open a trade, you start slightly in the negative because you entered at the Ask but would exit at the Bid. The price needs to move in your favor by at least the spread amount before you break even.
EUR/USD
USD/JPY
Pips and Pipettes
A pip, which stands for "Percentage in Point", is the standard unit of price movement. For most pairs, it's the 4th decimal place (0.0001), while for JPY pairs it's the 2nd (0.01). The smaller 5th or 3rd decimal place is a fractional pip, often called a "pipette."
In Forex, a pip is the fourth decimal place, while a pipette is the fifth. Tap or click the terms to see them in action.
EUR/USD 1.13561
Understanding Lot Sizes
Before you can calculate what a pip is worth, you need to understand lot sizes. A lot is simply a standardized unit of currency—like buying eggs by the dozen instead of individually. In forex, you don't buy 1 Euro or 100 Euros; you buy currency in standardized "lots."
The lot size you choose determines your position size, which directly affects how much money you make or lose per pip movement. There are four standard lot sizes:
| Lot Type | Units of Currency | Typical Symbol | Best For |
|---|---|---|---|
Standard Lot High Risk | 100,000 | 1.00 | Professional traders Accounts $50,000+ |
Mini Lot Good for Beginners | 10,000 | 0.10 | Beginner traders Accounts $1,000 - $10,000 |
Micro Lot Perfect for Learning | 1,000 | 0.01 | Learning traders Accounts $100 - $1,000 |
Nano Lot Practice Mode | 100 | 0.001 | First step after demo Accounts under $100 |
Beginner Recommendation
Start with 0.01 micro lots when trading with real money for the first time. A $500 account with 0.01 lot trades means risking only $1-5 per trade. This lets you practice risk management, deal with real emotions of winning/losing, and learn without blowing up your account. Once you're consistently profitable for 3 months, graduate to 0.1 mini lots.
How to Read Lot Sizes on Your Trading Platform
When you place a trade, your platform will ask for "Volume" or "Lot Size." Here's how different platforms display it:
MetaTrader 4/5 Format:
= 1 Standard Lot (100,000 units)
= 0.1 Mini Lot (10,000 units) - Recommended
= 0.01 Micro Lot (1,000 units) - Learning
Some Platforms Show Units:
= 1 Standard Lot
= 0.1 Mini Lot
= 0.01 Micro Lot
Calculating Pip Values
Now that you understand lot sizes, let's calculate what a pip is actually worth. If EUR/USD moves 50 pips against you, did you just lose $5, $50, or $500? It depends on your lot size and the currency pair. Here's the formula.
Why This Matters
You can't calculate your position size without knowing pip values. You can't know how much you're risking. You can't follow the 1% rule. This isn't optional knowledge—it's mandatory math for every single trade.
The Formula
Standard Formula for Most Pairs:
Pip Value = (0.0001 ÷ Exchange Rate) × Position Size
For JPY pairs, use 0.01 instead of 0.0001
Standard Lot (100,000 units) Examples
EUR/USD at 1.1000
1 Standard Lot (100,000 units)
Calculation:
Pip Value = (0.0001 ÷ 1.1000) × 100,000
Pip Value = 0.00009090 × 100,000
Pip Value = $9.09 per pip
What This Means: If EUR/USD moves 50 pips against you: 50 × $9.09 = $454.50 loss. If it moves 100 pips in your favor: 100 × $9.09 = $909.00 profit.
GBP/USD at 1.3000
1 Standard Lot (100,000 units)
Calculation:
Pip Value = (0.0001 ÷ 1.3000) × 100,000
Pip Value = 0.00007692 × 100,000
Pip Value = $7.69 per pip
50 pip move = 50 × $7.69 = $384.50 | 100 pip move = 100 × $7.69 = $769.00
USD/JPY at 150.00
1 Standard Lot (100,000 units)
Calculation (note: use 0.01, not 0.0001):
Pip Value = (0.01 ÷ 150.00) × 100,000
Pip Value = 0.00006667 × 100,000
Pip Value = $6.67 per pip
JPY Pairs Are Special: JPY pairs only have 2 decimal places (not 4), so a pip is 0.01 instead of 0.0001. This is why the pip value formula is different for them.
Pip Values Across All Lot Sizes
The pip value scales linearly with lot size. If 1 standard lot = $10/pip, then 0.1 lot = $1/pip, and 0.01 lot = $0.10/pip. This table shows exactly what a pip is worth for each lot size using EUR/USD as the example.
| Lot Size | Units | EUR/USD Pip Value | 50 Pip Move | 100 Pip Move |
|---|---|---|---|---|
| 1 Standard Lot | 100,000 | $10.00/pip | $500 | $1,000 |
| 0.5 Lots | 50,000 | $5.00/pip | $250 | $500 |
| 0.1 Lot (Mini)Good for Beginners | 10,000 | $1.00/pip | $50 | $100 |
| 0.01 Lot (Micro)Perfect for Learning | 1,000 | $0.10/pip | $5 | $10 |
| 0.001 Lot (Nano) | 100 | $0.01/pip | $0.50 | $1.00 |
Quick Reference
For most EUR/USD trading, remember these approximations:
- • 1.0 lot ≈ $10/pip
- • 0.1 lot ≈ $1/pip (beginners start here)
- • 0.01 lot ≈ $0.10/pip (perfect for practicing)
How to Calculate Your Position Size
Now that you know what a pip is worth, here's the critical question: How many lots should you actually trade? This isn't something you guess. You calculate it precisely based on how much you're willing to risk.
Why This Matters More Than You Think
Wrong position sizing is how traders blow up accounts. You can have the perfect trade idea, enter at the right price, and still lose everything if your position size is too large. This is the difference between surviving a losing streak and getting margin called.
The Core Concept
Your position size depends on THREE variables working together:
1. How Much You Risk
Following the 1% rule: On a $10,000 account, you risk $100 per trade. On a $5,000 account, you risk $50.
2. Your Stop Loss Distance
How many pips from entry to stop? A 50-pip stop means different position sizes than a 20-pip stop.
3. Pip Value of Your Pair
From the section above, you know 1 lot EUR/USD = ~$10/pip, 0.1 lot = $1/pip, etc.
The Relationship (Conceptual Understanding)
Here's the critical insight: Your position size inversely relates to your stop loss distance.
Scenario A: Wide Stop Loss
You Can Trade:
0.1 lots
($1/pip × 100 pips = $100 risk)
Why? A 100-pip stop is wide. To keep your total risk at $100, you need a SMALLER position (0.1 lots = $1/pip).
Scenario B: Tight Stop Loss
You Can Trade:
0.4 lots
($4/pip × 25 pips = $100 risk)
Why? A 25-pip stop is tight. You can afford a LARGER position (0.4 lots = $4/pip) while still risking only $100 total.
The Golden Rule
Same account size, same risk amount ($100), but DIFFERENT position sizes based on stop loss distance. Wider stop = smaller position. Tighter stop = bigger position. This is why you can't just "always trade 0.1 lots"—it doesn't account for stop distance.
Use a Position Size Calculator
While you can calculate this manually, every professional trader uses a calculator to eliminate human error and save time. We provide free position size calculators that do the math instantly.
Free Trading Calculators Available
Access our complete suite of forex calculators including position size calculator, pip value calculator, margin calculator, and more. Simply input your account size, risk percentage, and stop loss distance—the calculator does the rest.
Open Trading Calculators→Before Every Single Trade
Never enter a trade without calculating position size first. The workflow should be:
- Identify your trade setup and entry price
- Decide where your stop loss will be (in pips from entry)
- Calculate position size using calculator (based on 1% risk)
- Enter the trade with the calculated lot size
This discipline—not your technical analysis—is what will keep your account alive long enough to become profitable.
Critical Warning
Leverage is a double-edged sword. Why it's dangerous: When you use 1:100 leverage, you're controlling $100,000 with only $1,000 of your money. If the trade moves against you by just 1%, you lose $1,000—your entire capital. Meanwhile, a 1% move in your favor only gains you $1,000, not $100,000.
The key insight: profits and losses are calculated on the full position size ($100,000), but they come out of your actual capital ($1,000). This is why a small market move can wipe out your account. Treat leverage with extreme respect.
Understanding the Math: A Walkthrough
Before you use the leverage calculator below, let's manually walk through an example to see how these numbers are derived. This will make the calculator's output much clearer.
Imagine this scenario:
• Your Account Balance is $5,000
• Your broker offers 1:100 Leverage
• You want to trade 1 Standard Lot (100,000 units) of EUR/USD
• Let's assume the current EUR/USD price is $1.1000
Step 1: Calculate the Position Value
This is the total real-world value of the trade you are controlling.
100,000 units (Lot Size) × $1.1000 (Price) = $110,000
With your $5,000 account, you are controlling a position worth $110,000. This is the power (and risk) of leverage.
Step 2: Calculate the Required Margin
This is the amount of your own money the broker needs to hold as a deposit to open the trade.
$110,000 (Position Value) ÷ 100 (Leverage) = $1,100
The broker will set aside $1,100 from your account to keep this trade open. This isn't a fee; it's collateral that gets returned when you close the trade.
Step 3: Calculate the Margin Used Percentage
This shows how much of your account is currently tied up as margin for this single position.
($1,100 (Required Margin) ÷ $5,000 (Account Balance)) × 100 = 22%
This single trade is using up 22% of your account's available margin. A high percentage here signals high risk.
Now, let's apply this understanding to an interactive tool. The calculator below demonstrates this relationship in real-time. Adjust your account balance, the leverage offered by your broker, and the size of the trade you want to take. Pay close attention to the 'Margin Used' percentage—a high percentage means a small price move against you could lead to a margin call.
Balance, Equity and Margin
Each one of these figures tells you something different, but together they give you a complete picture of your trading account's health in real-time. It's crucial to understand what each one means.
Balance
The total cash in your account. This figure only changes when you close trades or deposit/withdraw funds.
Equity
The live value of your account. It's your Balance +/- the profit/loss of your open trades. If you have no open trades, Equity = Balance.
Margin
The amount of your own money the broker holds as collateral to keep your leveraged trade open. It is NOT a fee. It's a good-faith deposit that is returned to you when the trade is closed.
Free Margin
Your Equity minus the Margin being used. This is the capital you have available to open new positions.
Margin Level
The most critical health metric: (Equity / Margin) × 100%. If this level drops to a pre-defined point (e.g., 100%), you get a "Margin Call," a warning that you are at risk of your trades being automatically closed by the broker to prevent further losses.
A Practical Example
Let's tie these terms together. Use the simulator below to see these concepts in action. It simulates opening a 1 lot EUR/USD trade with 1:100 leverage at a price of 1.1200, which requires a margin of $1,120. Notice how your Equity drops slightly at the start to cover the spread!
Balance
$10,000
Equity
$10,000
Required Margin
$0
Free Margin
$10,000
Knowledge Check: The Numbers Game
Test your understanding of the key terms and calculations. These are the building blocks you'll use every time you trade.
Question 1:
EUR/USD moves from 1.1050 to 1.1073. How many pips did it move?
Reveal answer
Question 2:
You have a $2,000 account with 1:50 leverage. You want to trade 1 standard lot (100,000 units) of EUR/USD at 1.1000. What is the required margin, and what percentage of your account will be used?
Reveal answer
Required margin: $2,200. Margin used: 110%.
Position value = 100,000 × $1.10 = $110,000. Required margin = $110,000 ÷ 50 = $2,200. This exceeds your $2,000 account—you cannot open this trade! This is why understanding margin is critical before trading.
Question 3:
Your account shows: Balance: $5,000 | Equity: $4,700 | Margin: $1,000. What is your free margin, and what does the equity tell you about your open trades?
Reveal answer
Free margin: $3,700. Your open trades are currently losing $300.
Free margin = Equity - Margin = $4,700 - $1,000 = $3,700. Since Equity ($4,700) is less than Balance ($5,000), your open positions have unrealized losses of $300. If you closed all trades now, your balance would become $4,700.
Question 4:
Why would a trader choose to trade EUR/USD instead of USD/TRY, even if they think Turkish Lira will move more?