The arithmetic every trader must be able to do in their head before risking a cent.
~6 min for this grade0/4 lessons read
Pips, Lots, And The Math Of Trading
1 min
Don't skip this section. Every serious trader needs to be comfortable with pip values and profit-and-loss math before placing a single live trade.
What Is a Pip?
1 min
Figure — a pip is the fourth decimal place (the second for yen pairs)
A pip is the standard unit for measuring currency movement, the smallest place value in a quote. If EUR/USD moves from 1.2250 to 1.2251, that's one pip.
Because each currency has a different value, pip value has to be calculated per pair. When the dollar is quoted second (as in USD/JPY, USD/CHF, USD/CAD), the formula is:
pip size ÷ exchange rate = pip value
USD/JPY at 119.80: 0.01 ÷ 119.80 = 0.0000834
USD/CHF at 1.5250: 0.0001 ÷ 1.5250 = 0.0000655
USD/CAD at 1.4890: 0.0001 ÷ 1.4890 = 0.00006715
When the dollar is quoted first (EUR/USD, GBP/USD), you need an extra step to convert back to dollars:
EUR/USD at 1.2200: (0.0001 ÷ 1.2200) × 1.2200 ≈ 0.0001
GBP/USD at 1.7975: (0.0001 ÷ 1.7975) × 1.7975 ≈ 0.0001
In practice, your broker's platform calculates all of this automatically, but it's worth understanding the mechanics.
What Is a Lot?
1 min
Figure — lot sizes and roughly what one pip is worth on EUR/USD
Spot Forex trades in standardized lot sizes: a standard lot is $100,000, a mini lot is $10,000. Because a single pip is such a tiny fraction of a currency's value, you need meaningful position sizes to generate a meaningful profit or loss.
Recalculating pip values for a $100,000 lot:
USD/JPY at 119.80: (0.01 ÷ 119.80) × $100,000 = $8.34 per pip
USD/CHF at 1.4555: (0.0001 ÷ 1.4555) × $100,000 = $6.87 per pip
EUR/USD at 1.1930: roughly $10 per pip
GBP/USD at 1.8040: roughly $10 per pip
Calculating Profit and Loss
1 min
Say you buy USD and sell CHF at 1.4530 (one standard lot, $100,000), and the rate later moves to 1.4550, where you close the trade. That's a 20-pip gain. At $6.87 per pip, that's about $137.40 in profit.
Remember: you pay the spread when you *enter* a trade (using the offer price to buy) but not when you exit at the bid, and vice versa for a sell, you don't pay the spread going in, only coming out.
End-of-grade test
Answer all 3 questions. Score 67% or more to pass this grade.
1. On most pairs, one pip is which decimal place?
2. One standard lot is how many units of the base currency?
3. On EUR/USD, roughly what is one pip worth on a standard lot?
