Forex Foundations • Lesson 3
Pips, Lots & Leverage 📏
Before placing any trade, you must understand pips, lots, and leverage. These three terms affect how much you can gain or lose when price moves.
Measure price movement.
Control trade size.
Increases buying power and risk.
Why These Terms Matter
A trade is not only about whether price goes up or down.
You also need to understand how much the movement is worth.
Beginner rule:
Pips show how far price moved. Lots decide how much that move is worth. Leverage decides how much position size you can control.
That is why risk comes before profit.
What Is a Pip?
A pip is a small unit used to measure price movement in forex.
For most currency pairs, one pip is the fourth decimal place.
Pip Example
EUR/USD: 1.0800 → 1.0801
That is a move of 1 pip.
If EUR/USD moves from 1.0800 to 1.0850, that is a move of 50 pips.
Candlestick Example: 50-Pip Move
Candlestick Example
EUR/USD moving from 1.0800 to 1.0850
50 pips
This example shows price moving upward by 50 pips. The candles help you see how price moved from the lower price area to the higher price area.
Pip Example
Let’s say GBP/USD moves from 1.2500 to 1.2530.
That is a move of 30 pips.
If it moves from 1.2500 to 1.2470, that is also a move of 30 pips, but in the opposite direction.
Upward Move
GBP/USD moves from 1.2500 to 1.2530. That is 30 pips upward.
Downward Move
GBP/USD moves from 1.2500 to 1.2470. That is 30 pips downward.
Pips measure movement.
They do not automatically tell you how much money was made or lost.
For that, you need to understand lot size.
Yen Pairs Are Different
Pairs with the Japanese yen usually use the second decimal place for pips.
Yen Pair Example
USD/JPY: 150.00 → 150.01
That is a move of 1 pip.
If USD/JPY moves from 150.00 to 150.50, that is a move of 50 pips.
What Is a Lot?
A lot is the trade size.
It controls how much each pip movement is worth.
Common Lot Sizes
100,000 units
10,000 units
1,000 units
100 units
The bigger the lot size, the bigger the profit or loss when price moves.
Why Lot Size Matters
Two traders can take the same trade but have very different results because of lot size.
Same Move, Different Risk
The market moves 20 pips
Trader A: Smaller Lot
A 20-pip move has a smaller money impact. The trade is easier to manage emotionally.
Trader B: Larger Lot
The same 20-pip move has a much larger money impact. Profit and loss both become bigger.
The trade idea can be the same, but the risk is not the same.
What Is Leverage?
Leverage allows you to control a bigger trade with a smaller amount of money.
Example:
Leverage Example
1:100 leverage
This means you can control a position much larger than the money required as margin.
Leverage can make profits bigger, but it can also make losses bigger.
That is why beginners must be careful with leverage.
Leverage Can Be Dangerous
Imagine you have a small account and you use high leverage.
A small move in your favour may look exciting.
But a small move against you can also damage your account quickly.
Serious beginner warning:
High leverage does not make a bad trade safe. It only allows bigger exposure, which can make losses happen faster.
Good traders do not focus only on how much they can make.
They focus first on how much they can lose.
Margin
Margin is the amount of money your broker sets aside to open and keep a leveraged trade running.
It is not a fee.
It is like a security amount required to hold the position.
If your trade goes too far against you, your broker may close the trade automatically to protect the account from going below the required margin.
Simple Margin Idea 🧠
Margin is the money held aside to keep a leveraged trade open. It is not the full trade size, and it is not a trading fee.
Beginner Risk Rule
Before taking any trade, ask:
Risk Comes First ✅
Ask first: How much can I lose if this trade is wrong?
Do not start with: How much can I make?
Risk comes first.
Profit comes second.
Simple Position Size Thinking
A beginner should understand this order:
Better Order of Thinking 🎯
1. Account size
2. Risk amount
3. Stop loss distance
4. Lot size
5. Trade entry
Many beginners do it backwards.
They choose a big lot size first, then panic when the trade moves against them.
Mini Practice
Try This on a Demo Account 🧪
Open a demo chart and practise measuring pips before placing any real trade. The goal is to understand movement and risk, not to rush into entries.
Choose one pair, such as EUR/USD or GBP/USD.
Measure a recent move from one price to another.
Change the demo lot size and notice how the money value changes.
Write one sentence explaining why lot size matters.
Quick Self-Check
Before moving on, test yourself:
What is a pip?
A pip is a small unit used to measure price movement in forex.
What does lot size control?
Lot size controls trade size and affects how much each pip movement is worth.
Why is leverage risky?
Leverage allows you to control larger positions, which can increase both profits and losses.
What should beginners focus on first?
Beginners should focus on how much they can lose if the trade is wrong.
Quick Recap
What You Learned ✅
- A pip measures price movement.
- Most non-yen pairs measure pips at the fourth decimal place.
- Yen pairs usually measure pips at the second decimal place.
- A lot controls trade size.
- Bigger lot size means bigger profit or loss.
- Leverage lets you control larger positions.
- Leverage increases both risk and reward.
- Margin is the amount needed to hold a leveraged trade.
- Beginners should focus on risk before profit.
⚠️ Educational only — not financial advice.
Use demo trading to practise pips, lot size, margin, and leverage safely. Never use high leverage or large lot sizes without understanding the risk.