Another key difference in the quote of an FX pair is the fact that prices are offered, in many cases, to five digits. Most markets are denominated in a much more common sense manner, using prices that resemble those which we see in our everyday lives, quoted to 2 decimal places. When I want to buy some flour at the store, the price will be quoted 2 digits beyond the decimal place; like R4.56. If I want to buy a car, once again, prices are quoted 2 places past the decimal with a price such as R54,367.31.
But in the FX Market, more precision is needed, and prices are quoted up to 5 digits beyond the decimal. Let’s look at a quote on EUR/USD for further examination. Let’s assume that the bid on EUR/USD is 1.27218.
The first three digits of this number are just like any other price that we will see. In this case the Euro is worth One dollar, and 27 cents. The digits after help further define this quote.
The next 2 digits in this quote are called ‘pips,’ which is short for ‘percentage in point.’ In this quote, the Euro is trading at 1 dollar, 27 cents, and 21 pips, or 21/100ths of a cent. Another way of saying this same quote would be One dollar, 27 cents, and 21 pips.
The fifth digit of this quote is called a ‘fractional pip,’ and some Foreign Exchange brokers do not offer this fifth digit. The fifth digit further helps define price, and represents ‘tenths of a pip.’ In the case of the above quote, it can be read One dollar, 27 cents, 21 pips, and 8/10th of a pip..

The current average daily range (over the past 14 days) of the EUR/USD currency pair is approximately 115 pips. Using the EUR/USD current market price of (1.2726 as of this writing), the average range is approximately .9%, or less than 1%.
This is much less volatility than many traders, including myself, are looking for.
In the FX market, leverage is available so that I can make these smaller moves work in the way that I want. For most traders in the United States, up to 50X leverage is available. Meaning, I could lever up a .9% daily move 50 times on my portfolio, theoretically allowing me to turn a .9% gain into a 45% gain at 50:1 leverage.

Most professional traders keep their leverage inside of 10:1. Meaning, if they have $10,000 on deposit with their broker, they will keep their position sizes under $100,000. Or if they have $2,000 on deposit, they will keep their positions under $20,000.
To find leverage, we can simply multiply the account deposit times the leverage factor (such as 10X or 5X) to find the desired position size to stay inside of their desired leverage level.
Let’s walk through a full example together.
Let’s assume that our trader has $10,000 on deposit, and wanted to use a 2x leverage factor. This would allow them to open a trade of up to $20,000.
Let’s assume they wanted to speculate on the EUR/USD currency pair.
They could purchase (or sell) 2 standard lots (each standard lot is $10,000 of the base currency, or the second currency in the quote), to arrive at a position size of $20K.
Trader’s deposit: $10,000
Leverage Factor: 2X
Position Size: $20,000 (or 2 standard lots, as each standard lot is $10,000 USD).

“PIP” stands for Point In Percentage. More simply though, a pip is what we in the FX would consider a “point” for calculating profits and losses. When trading a mini lot (10k units of currency), each pip is worth roughly one unit of the currency in which your account is denominated. If your account is denominated in USD, for example, each pip (depending on the currency pair) is worth about $1. In all pairs involving the Japanese Yen (JPY), a pip is the 1/100th place -- 2 places to the right of the decimal. In all other currency pairs, a pip is the 1/10,000 the place -- 4 places to the right of the decimal.

You’ll see that the digits for pips are in a larger font. This makes them easier to see. Additional transparency is provided through most electronic platforms as each currency pair is quoted with precision to 1/10th of a pip. This fraction of a pip allows price providers to bring spreads down even further as they are not restricted to quoting in full pip increments. This is beneficial to you, the trader, because the spread is a component of your transaction cost.
Now, let’s identify what the actual value per pip is.
For those who wish to determine the calculation by hand, follow this method below (if you are not interested in the mathematics involved, then proceed to the next article).
First you start with the size of your trade. If you want the value of a pip for a mini lot, you start with 10,000. You then multiply your trade size by one pip for the pair that you are trading.
In this example we are going to calculate the value of a pip for one 10k lot of EUR/USD.
So since I am using 10k mini-lot, I’m starting with 10,000. I multiply 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs).
That gets me a value of 1. That will be valued in the “counter currency” (second currency) of the pair that I am trading. In this example, I am trading EUR/USD, so USD is the counter currency of the pair. One pip is worth 1 USD dollar for one 10k lot of EUR/USD.
If my trading account is based in US Dollars, then I will see $1 of profit or loss on my account for every 1 pip move that the EUR/USD makes in the market.
Now, if my trading account is based in Euros (EUR), I would have to convert that $1 USD into Euros. To do so, I just divide by the current EUR/USD exchange rate which at the time of writing is 1.3797. I’m dividing here because a Euro is worth more than a USD, so I know my answer should be less than 1. 1 divided by 1.3797 is 0.7248 Euros. So now I know that if I have a Euro based account, and profit or lose one pip on 1 10k lot of EUR/USD, I will earn or lose 0.7248 Euros.

Overview:

Knowing and understanding the proper terminology within the Foreign Exchange market is essential in becoming a successful trader. In this article we discuss and define what pips, lots, margin and leverage are. We also provide examples of each for easier comprehension.

Pips and Lots

Currency traders quote the value of a currency pair, and trade sizes, in pips and lots. A pip is usually the smallest amount by which the value of a currency pair can change, although these days some brokers offer fractional pip quotes too. In example, when the value of the EUR/USD pair goes up by one tick (i.e. pip) the quote will move from 1.2345, to 1.2346, and the size of the movement is just one pip. An important guideline for the beginning trader is to measure success or loss in an account by pips instead of the actual dollar value. A one pip gain in a $10 account, is equal, in terms of the trader’s skill, to a 1 pip gain in a $1,000 account, although the actual dollar amount is very different.

The smallest size in currency trading for professional traders is called a lot. For USD-based pairs, the lot size is 100,000. In other words, when you enter a trade with your margin account, the smallest amount that you can buy or sell is 100K, regardless of the size of your margin.

Margin and Leverage

Another important concept in currency trading is the twin phenomenon of margin and leverage. This is a concept that carries a high degree of risk, but since Foreign Exchange prices move very slowly (in terms of the actual change in value), the vast majority of traders leverage their accounts when engaging in short-term trading.

When you open a Foreign Exchange account, the broker will request that you deposit a small sum, known as margin, as insurance against the losses that your account may suffer. With this small sum, you’re able to control a much larger amount, enabling greater gains, but also greater losses than you would be able to achieve with your deposit. It’s easier to understand margin and leverage in the context of a borrowing process. The lots that you can trade are borrowed from your broker, who requires a margin deposit as an insurance against losses. The ratio between the funds borrowed by you, and the margin that you deposit as insurance is called leverage. Thus, if you set a leverage ratio of 100:1, enabling the trade of 1,000,000 USD with just 10,000 USD in deposit, but eventually trade just 100,000, the actual leverage that you would be using is 10:1. Note that leverage over 50:1 for majors and 20:1 for minors is not available to traders in the U.S

In order to understand how to manage your account you must gain a good understanding of leverage. Failure to pay proper attention to leverage and margin may result in a margin call and the broker may liquidate your position in order to ensure that your losses do not reach a level where your margin deposit is insufficient to cover them. Increasing leverage = increases risk.