Pips, Points, Lots, and Spread Explained
A clear explanation of the measurement units that determine trading cost, position size, and profit or loss.
Pips, points, lots, and spread are the operating language of forex. Confusing these units can turn a reasonable strategy into a dangerous position.
Price Measurement
A pip is commonly the fourth decimal place on most forex pairs and the second decimal place on many JPY pairs. A point is the smallest price increment shown by the broker and may be one-tenth of a pip on five-digit quotes.
Spread is the distance between bid and ask. The position normally begins negative by approximately the spread because a buy opens at ask and closes at bid, while a sell does the reverse.
Position Size
A lot describes trade volume. Standard, mini, and micro lots represent different contract sizes, but the actual value depends on the symbol specification and account currency.
Choose lot size from the stop distance and acceptable account risk, not from a desired profit target.
Practical Checklist
- Confirm symbol digits and tick value.
- Calculate monetary risk before entry.
- Include spread and commission in testing.