Basics
Pips, lots and spreads explained
How price moves are measured, how trade size turns pips into money, and what the spread costs you on every trade.
NextTrade Education TeamUpdated 8 min read
Key takeaways
- A pip is the standard unit of price movement in a currency pair; a pipette, or point, is one tenth of a pip.
- Lot size sets how much each pip is worth, so it scales gains and losses by the same amount.
- The spread is the gap between the buy and sell price, and every new position starts behind by that gap.
- Spreads change with liquidity, volatility and news; the platform shows the live spread before you trade.
On this page
What a pip is
A pip is the standard unit for measuring how much the price of a currency pair moves. For most pairs, such as EUR/USD, a pip is the fourth decimal place of the price (0.0001). For pairs quoted in Japanese yen, such as USD/JPY, it is the second decimal place (0.01).
Hypothetically, if EUR/USD moves from 1.1000 to 1.1025, it has moved 25 pips. If USD/JPY moves from 150.00 to 150.40, it has moved 40 pips.
Pipettes and points
Most platforms, including MetaTrader 5, quote one more decimal place than the pip. That extra digit is a pipette, or fractional pip: one tenth of a pip. MT5 calls this smallest step a point, so on these pairs 10 points equal 1 pip. This is why the typical spreads on our pricing page are listed in points.
Lots: how trade size is measured
A lot is the unit used to set the size of a trade. In forex, 1 standard lot is 100,000 units of the base currency, the first currency in the pair. So 1 standard lot of EUR/USD is 100,000 euros.
Smaller sizes are written as decimals. A mini lot is 0.1 lots (10,000 units) and a micro lot is 0.01 lots (1,000 units). You choose the size in the order window of your platform, usually as a number of lots, sometimes called volume.
Lot size and leverage
A 1-lot EUR/USD position is worth about 100,000 euros. With leverage, the margin you put up is only a fraction of that, but gains and losses are calculated on the full position, so they can be large compared with your balance. The leverage guide explains how margin is worked out.
Please note that trading with leverage increases both potential profits and losses and may result in the loss of your invested capital.
How much a pip is worth
The value of one pip depends on two things: the size of the trade and the quote currency, which is the second currency in the pair. The formula is:
Pip value = pip size × number of units
For EUR/USD the pip size is 0.0001 and the quote currency is the US dollar, so 1 standard lot gives 0.0001 × 100,000 = $10 per pip.
| Lot size | Units of EUR | Value of 1 pip (USD) |
|---|---|---|
| Standard (1 lot) | 100,000 | $10 |
| Mini (0.1 lots) | 10,000 | $1 |
| Micro (0.01 lots) | 1,000 | $0.10 |
When the US dollar is not the quote currency, as in USD/JPY or EUR/GBP, the pip value is first worked out in the quote currency and then converted at the current exchange rate. It therefore changes slightly as prices move. Your trading platform does this conversion for you.
What the spread is
Every price has two sides. The bid is the price at which you can sell, and the ask is the price at which you can buy. The spread is the difference between them, usually measured in pips.
Hypothetically, if EUR/USD is quoted at 1.1000 / 1.1002, the spread is 2 pips. A buy opens at the ask (1.1002), but the position is valued at the bid (1.1000), the price you would get if you closed it. So a new position starts slightly negative by the size of the spread. A sell works the other way: it opens at the bid and closes at the ask.
In money, the spread costs: spread in pips × pip value × number of lots. On 1 standard lot with a 2-pip spread, that is 2 × $10 = $20, paid whether the trade later gains or loses. Spreads, commissions and swaps are compared in the trading costs guide.
Why spreads change
Spreads are not fixed. They depend on how many buyers and sellers are active (liquidity) and how fast prices are moving (volatility).
- Busy hours, such as when major trading sessions overlap, often have narrower spreads.
- Quiet hours, such as late at night or around the daily market close, can have wider spreads.
- Major economic releases and unexpected news can widen spreads sharply for a short time.
- Less traded pairs, such as exotic pairs, usually have wider spreads than major pairs.
This is why brokers publish spreads as "from" or "typical" figures. At NextTrade, Raw and VIP accounts have raw spreads from 0.0 pips plus a commission per lot, while the Standard account has an all-in spread with no separate commission. The typical EUR/USD spread on the pricing page is 13 points (1.3 pips) on Standard and 2 points (0.2 pips) on Raw, measured in normal market conditions. Actual spreads may vary with market volatility and liquidity, and the live spread is always shown in the platform before you trade.
Putting pips, lots and spreads together
To work out the result of a trade in money, you need three things: how many pips the price moved, the value of one pip for your trade size, and the spread you paid to get in.
- Count the pips between your opening price and your closing price.
- Multiply by the pip value for your lot size.
- Remember that the spread is already inside these prices: a buy opens at the ask and closes at the bid.
Hypothetical example: the same 0.1-lot buy, closed higher or lower
- Trade
- Buy 0.1 lots of EUR/USD (10,000 euros)
- Quote when opening
- 1.1000 / 1.1002 (2-pip spread)
- Value of 1 pip
- $1
- Opens at the ask: 1.1002
- If the bid rises to 1.1032: 30 pips × $1 = +$30
- If the bid falls to 1.0982: 20 pips × $1 = −$20
Result: a gain of $30 or a loss of $20; the 2-pip spread is inside both figures
The loss is larger than the market's fall because of the spread. Read the risk note.
Hypothetical example: a 40-pip move on three trade sizes
- Pair
- EUR/USD
- Price move
- 40 pips, up or down
- 1 lot: 40 × $10 = $400
- 0.1 lots: 40 × $1 = $40
- 0.01 lots: 40 × $0.10 = $4
Result: the same move is a gain or a loss of $400, $40 or $4, depending on size and direction
Lot size scales losses exactly as much as gains. Read the risk note.
Risk note
Trading forex and CFDs with leverage carries a high level of risk and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment. You should not invest money that you cannot afford to lose.
High leverage magnifies both potential profits and potential losses. Before deciding to trade, carefully consider your investment objectives, level of experience, and risk appetite. Seek independent financial advice if necessary. NextTrade provides negative balance protection on all retail accounts, meaning you cannot lose more than your deposited funds, but you can lose all of your deposited funds.
The prices, spreads and results in this guide are hypothetical or typical figures for education. They are not a forecast of your costs or results.
Frequently asked questions
What is the difference between a pip and a point?
A pip is the fourth decimal place on most currency pairs and the second on yen pairs. Platforms such as MetaTrader 5 quote one more decimal, and call that smallest step a point, or pipette. On these pairs, 10 points make 1 pip, so a spread shown as 20 points is 2 pips.
How much is one pip worth on 0.01 lots?
On EUR/USD and other pairs quoted in US dollars, 0.01 lots is 1,000 units, so one pip is worth $0.10. A 50-pip move on that size is $5, as a gain or a loss depending on direction. On pairs quoted in other currencies, the value is converted and changes slightly with the exchange rate.
Why did my position show a loss as soon as I opened it?
Because of the spread. A buy opens at the ask price but is valued at the bid, the price you would get if you closed straight away; a sell works the other way round. The position therefore starts negative by the spread, and the price has to move by that amount in your favour before it breaks even.
Is a lower spread always cheaper?
Not necessarily. On some accounts a lower spread comes with a commission per lot, so you need to add both to compare. At NextTrade, Raw and VIP accounts pair raw spreads from 0.0 pips with a commission, while the Standard account includes its trading costs in the spread. Spreads also change with market conditions.
Related guides
- Costs & risk8 min read
Trading costs: spread, commission and swap
What you pay to open, hold and close a trade, how each cost is calculated and where NextTrade publishes its figures.
- Basics8 min read
What is forex and how does it work?
How the global currency market works, how a forex trade is priced, and the risks that come with trading it.
- Costs & risk8 min read
Position sizing: how to work out how many lots to trade
A step-by-step method for setting the size of a trade from the amount you are prepared to lose, your stop loss and pip value.