Pips, Lot Size and Leverage Explained (With Simple Examples)
By Advait, founder of Trade with Advait · Updated 6 Oct 2026
Almost every forex beginner gets stuck on the same three words: pip, lot and leverage. They look like jargon, but together they decide how much you can win or lose on a single trade. This guide explains each one in plain language, with small worked examples, so you can see the real numbers before you ever place a trade.
What is a pip?
A pip is the standard small unit used to measure price movement in a currency pair. For most pairs, one pip is 0.0001. If EUR/USD moves from 1.1000 to 1.1001, that is a move of one pip. For pairs that include the Japanese yen, such as USD/JPY, one pip is 0.01.
Many brokers also show a fifth decimal place (or a third decimal for yen pairs). That extra digit is a pipette, which is one tenth of a pip.
What is a lot?
A lot is the size of your trade. Forex is traded in standard sizes:
- Standard lot: 100,000 units of the base currency
- Mini lot: 10,000 units (0.10 lot)
- Micro lot: 1,000 units (0.01 lot)
Most platforms, including MetaTrader 5, let you type the size directly as a number such as 1.00, 0.10 or 0.01.
How much is one pip worth?
The value of a pip depends on your lot size. For pairs where the US dollar is the second currency, such as EUR/USD, the common rule of thumb is:
- 1 standard lot: about $10 per pip
- 1 mini lot (0.10): about $1 per pip
- 1 micro lot (0.01): about $0.10 per pip
So a 20 pip move on one standard lot is roughly $200, while the same 20 pip move on a micro lot is roughly $2. The pip value for other pairs differs a little, and your platform shows the exact number. Gold (XAU/USD) is not a normal currency pair: on most MT5 brokers 1 lot is 100 ounces, so a $1 move in gold is about $100 per lot. Always check the contract size with your broker.
What is leverage?
Leverage lets you control a larger position than the money you put up. A leverage of 1:100 means each $1 of your own money (margin) supports $100 of position size.
Example: one standard lot of EUR/USD at a price of 1.10 is worth about $110,000.
- At 1:100 leverage, the margin needed is about $1,100
- At 1:500 leverage, the margin needed is about $220
Higher leverage means less margin is blocked, so you can open a bigger position with a small account. It does not reduce risk. It only changes how much of your account is tied up.
Why leverage cuts both ways
Leverage magnifies profits and losses in the same way. Take a $1,000 account that opens one full standard lot of EUR/USD (about $10 per pip). A 100 pip move against you is about $1,000, which is the entire account. The same account trading a micro lot (about $0.10 per pip) would lose only about $10 on that move.
This is why most blown accounts come from position size that is too large for the account, not from a bad indicator.
A simple way to choose lot size
Instead of guessing, work backwards from the amount you are willing to lose:
- Decide your risk per trade, commonly 1% of the account. On a $1,000 account that is $10.
- Decide your stop loss distance in pips from your chart, for example 20 pips.
- Divide the risk by the stop distance: $10 divided by 20 pips is $0.50 per pip.
- At about $0.10 per pip for 0.01 lot, $0.50 per pip is about 0.05 lot.
If the stop loss is hit, you lose about $10, which is the 1% you planned. If the trade works, the profit is based on the same lot size.
Common beginner mistakes
- Choosing the lot size first and the stop loss second
- Using the maximum leverage offered and calling it a strategy
- Ignoring that spread and slippage also cost pips
- Increasing lot size after a loss to win it back
- Trading without a stop loss
Where this fits into a bigger plan
Knowing pips, lots and leverage helps you size risk, but it is not a strategy on its own. Pair it with a clear approach to trend and volatility, and always practise on a demo account first.
Learn more
- Beginner basics: https://tradewithadvait.com/forex-trading-for-beginners
- Gold trading guide: https://tradewithadvait.com/gold-trading-xauusd-guide
- Best time to trade gold in India (IST): https://tradewithadvait.com/best-time-to-trade-gold-india-ist
- How an algo manages risk: https://tradewithadvait.com/algo-trading-forex-mt5-guide
- Free Telegram channel (daily Gold and BTC ideas, news, education): https://t.me/TradeWithAdvaitFX
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Frequently asked questions
What is a pip in forex?
A pip is the standard small unit of price movement. For most pairs one pip is 0.0001 (for yen pairs it is 0.01). If EUR/USD moves from 1.1000 to 1.1001, that is one pip.
What is the difference between a standard, mini and micro lot?
A standard lot is 100,000 units, a mini lot is 10,000 units (0.10 lot) and a micro lot is 1,000 units (0.01 lot). On EUR/USD that is roughly $10, $1 and $0.10 per pip respectively.
Does higher leverage mean higher profit?
Higher leverage only lowers the margin needed for a position. It magnifies both profits and losses, so using more leverage without reducing position size increases your risk.
Disclaimer: This page is for education only and is not investment advice. Trading Forex and Gold involves a high risk of loss and you can lose more than you expect. Past or backtested performance does not guarantee future results. Only trade with money you can afford to lose. Check that any broker or platform is permitted for you under the laws that apply to you.