How Forex is Priced — Pips, Spreads, and Lots

Module 4: Forex Trading

3.1

The language of forex pricing

Every market has its own unit of measurement. Stock traders talk about cents and dollars. Bond traders talk about basis points. Commodity traders talk about barrels and ounces.

Forex traders talk about pips.

Before you can trade forex intelligently, before you can calculate whether a trade is worth taking, how much you stand to make, how much you stand to lose, or where to place your stop loss, you need to understand how forex prices are measured and quoted. This chapter explains that language from the ground up so that nothing on your trading platform ever leaves you guessing.

3.2

What a pip actually is

A pip, which stands for percentage in point, is the smallest standard unit of price movement in a currency pair.

For most currency pairs, a pip is the fourth decimal place. If EUR/USD moves from 1.08500 to 1.08510, it has moved one pip. If it moves from 1.08500 to 1.09500, it has moved 100 pips.

USD/JPY is the main exception. Because the yen is a low-value currency, JPY pairs are quoted to only two decimal places. A pip in USD/JPY is the second decimal place. If USD/JPY moves from 148.00 to 148.01, that is one pip.

You will also encounter the term pipette or point on some platforms. This is the fifth decimal place, one tenth of a pip. Most brokers now quote to five decimal places for precision, but traders still measure moves and profits in pips.

Pips matter because they are the universal language of forex profit and loss. When a trader says they made 50 pips on a trade or their stop loss is 30 pips away, everyone in the forex world immediately understands what that means regardless of how large their position is.

3.3

Lots , the unit of trade size

In forex, the size of your trade is measured in lots. A lot is a standardised unit that represents a specific amount of the base currency.

Lot Sizes and Pip Values , EUR/USD

Lot Type	Units of Base Currency	Pip Value (approx)	50 Pip Move Profit/Loss	Suitable For
Standard Lot	100,000	$10 per pip	$500	Experienced traders with larger accounts
Mini Lot	10,000	$1 per pip	$50	Intermediate traders building consistency
Micro Lot	1,000	$0.10 per pip	$5	New traders learning position management
0.01 Lot	1,000	$0.10 per pip	$5	Starting point on Navion Pro

3.4

The spread , the cost of every trade

When you open any currency pair on Navion Pro you will notice there are always two prices shown, not one.

Take EUR/USD as an example. You might see 1.08498 on one side and 1.08510 on the other. These two prices are the bid and the ask.

The bid is the lower price, the price at which the market will buy from you. If you want to sell EUR/USD, you sell at the bid.

The ask is the higher price, the price at which the market will sell to you. If you want to buy EUR/USD, you buy at the ask.

The difference between the two, in this example 1.2 pips, is the spread. The spread is the broker''s primary revenue on standard accounts. You buy at the higher price and sell at the lower price. That difference flows to the broker.

What this means practically is that every trade you open starts slightly in the red. If you buy EUR/USD at 1.08510 and immediately want to close the trade, you can only sell at the bid which is 1.08498. You are immediately down 1.2 pips before the market has moved at all. You need the market to move at least the spread distance in your favour just to break even.

When Spreads Widen , Watch These Conditions

During major news releases: liquidity providers pull their tight quotes. EUR/USD spread can widen from 1 pip to 10 to 15 pips in the seconds around NFP.
Overnight and Asian sessions: fewer active participants means wider spreads on non-yen major pairs.
Public holidays in major financial centres: reduced participation widens spreads across the board.
Monday open: the gap from the weekend close means spreads are often wider until liquidity normalises.
Always check the spread before entering. An unusual spread is a warning that conditions are not normal.

3.5

Leverage and margin in forex , amplifying your exposure

The forex market is almost always traded with leverage. Understanding leverage is not optional. It is one of the most important concepts in the entire module.

Leverage allows you to control a position much larger than the amount of money you have deposited. If your broker offers 100:1 leverage, a deposit of $1,000 allows you to control a position worth $100,000.

The deposit required to open and maintain a leveraged position is called margin. It is not a fee. It is a security deposit, money set aside to cover potential losses on your position.

Leverage amplifies both profits and losses equally. A 1% move in a $100,000 position is $1,000. If you only deposited $1,000 to control that position, a 1% adverse move wipes out your entire deposit. A 1% favourable move doubles it.

Leverage Effect , $1,000 Account Controlling Different Position Sizes

Key Takeaways

A pip is the smallest standard unit of price movement in forex. The fourth decimal place for most pairs, the second decimal place for JPY pairs.

Lot sizes define trade volume. A standard lot is 100,000 units, a mini lot is 10,000, a micro lot is 1,000. The pip value in dollars depends on lot size.

The spread is the difference between the bid and ask price. It is the primary cost of every trade and means every position starts slightly underwater.

Spreads are tightest on major pairs, widen on minor pairs, and are widest on exotic pairs. They also widen during low liquidity periods and around major news releases.

Leverage allows you to control positions much larger than your deposit. It amplifies both profits and losses. Using it conservatively is one of the most important disciplines in forex trading.

Chapter Quiz

5 questions · Test your understanding · Requires Navion Pro account to save score