Forex Jargon 101: How To Read Currency Pairs What are Lot-Sizes, Pips & Pipettes

And How to Know Exactly How Many Lots You Can Safely “Bet” Based On Pips/Proper Risk Management

So often, when you first develop an interest in the world of Forex Trading, you immediately start consuming endless mountains of information on the subject. Everything from how to do technical analysis, to price action and learning to find good trade set-ups to earn those big profits. Heck, I’ve seen some folks get rather decent at learning to run technical analysis while neglecting to even learn what proper

This easily becomes one of the biggest reasons most Beginning Forex Traders blow their accounts so quickly. Actually, the true figure lies somewhere at about 80% of Brand New Forex Traders blow their first live trading account at least once and lose all of their money. Why? They neglected to know basic math. What about the other 20 percent? Well, they didn’t blow their accounts. Why? The same point can be said, they understand and follow basic math.

The key here is first understanding, and then being disciplined enough to apply, no matter how badly you want that MEGA-win profiting trade so you can show off on social media. For example, let’s just say, you start with an account size of $2000 Dollars and place a .50 lot size on a 100 pip move. You would be betting 25% of your account or 500 bucks on one single trade. But what if you’re wrong? Do that a few times and you just paid a banker or broker to take his hot young mistress out on another date.

This is why it’s so vitally crucial to know exactly how much you’re betting on every single trade so even if you lose more trade than you win, you still make more money than you lose. In fact, I would argue (alongside many other Forex Professionals) that it’s the only way you win over the long run.

Understanding Pairs:
Now we all know what a pair is and we’ve heard of major pairs which are traded like, the EUR/ USD, the USD/JPY the GBP/USD, The AUD/USD.

But when you look at a chart like the one below, we’ll be analyzing the Euro/US Dollar Pair. Do you know what the actual numbers to the right mean?

As you can see right now the price on this pair is currently trading at 1.10883. Over the last month, the price has gone as low as 1.09808 and 1.12402. But what exactly do those numbers mean? While most beginning traders are trying to guess, whether it’s going to go up or down so they can place a bet, instead let’s get the basics down and just understand what they mean.

Whenever you have a pair, the first pair in the sequence is called the “BASE Currency,” while the second is considered the “QUOTE Currency.”

So in the example, we have above (EUR/USD) the Base currency is the Euro and the Quote Currency is the US Dollar. This means that $1 Euro it’s currently traded for $1.10 US Dollars.

If the Pair was the (GBP/EUR) and the price is currently trading at 1.1731, that simply means that $1 British pound is equal to $1.17 Euros.

Last example, what about the (USD/JPY) if it’s trading at 110.109? That would mean you trade $1 US Dollar for 110.10 Japanese Yen.

The base currency is the first currency in the pair and always sits at 1. While the second currency is always the listed price against the first pair. To make it easier, just always remember that the price you see on the right-hand side is the price of the second currency in the pair when you exchange it for the first currency in the pair.

Understanding Pips, and Pipettes

Now that we understand what price means between pairs lets move onto one of the most commonly used terms in Forex. “PIPS.” What’s so interesting, is that although the word is common, it’s also one of the least understood among beginners.

So what is a pip?

A pip is the 4 number AFTER the dot at a price. So for example if, GBP/USD (British Pound/US Dollar) is trading at 1.30150, Then the number 5 is a pip. So if the market moved up to 1.30160 then that would be a 1 pip move. If the market moved to 1.30250 that would be a 10 pip move. At 1.31150, that’s a 100 pip move.

So if we went back to the example above, the (EUR/USD) is currently trading at 1.10883 meaning it requires 1 dollar and 10 cents in US dollars in order to get 1 Euro. So if the market moved up top 1.11883. then that would be the equivalent to a 100 pip move. Now if you went to a bank to exchange your Euros for US Dollars, you would get 1 Dollar and 11 Cents for every 1 Euro.

Don’t Let this example confused you, but because you get less US Dollars Back for every Euro you trade-in, essentially that means the Euro is a weaker currency or economy. If you walked into a bank with a stack of 100 bucks US and wanted Euro’s, you would get 111 Euros. On the flip side, if you walked into the bank with 100 Euros, and wanted to exchange them for US dollars, you would only get $89 bucks.

A pipette is much less focused on and it is the smallest “market move” referred to in Forex as it is the 5th number to the right of the decimal. In the example of the (GBP/USD) trading at 1.30854, the number 4 is a pipette and the number 5 is a pip.

NOTE: The only pair that has a different “pip” by definition is the JPY Pairs because the number only goes 3 numbers to the right of the decimal. (USD/JPY) trades at 110.109 so there is no 4th number like the other pairs, this means that the 2nd number over from the decimal is considered a “pip” and the 3rd number over is a “pipette.”

Understanding LOT Sizes

Now that we understand Currency Pair Pricing and Pips, hopefully, we’re ready to move onto the third and final piece to the puzzle and that’s “Lot Sizes and their equivalent dollar amount.

A question I get all of the time is “What Lot Size amount do I know to wager on every trade.” To make a long answer short, the lot size you place is subjective to the number of pips a market moves and the amount of money you’re willing to safely bet. So if you had $10,000 dollars in your trading account, your “lot size” per trade would probably be bigger than an account with only $1,000.

So how do you know? First Let’s Define what a “Standard Lot” is in the world of Forex. Placing a 1.0 Lot size is the equivalent of betting $10 dollars on every 1 pip movement. If you bet half of that, a .5 Lot size is a $5 bet on every 1 pip movement. Then so on and so forth, here’s a quick list to look at.

Lot Sizes to Dollar Equivalent

10.0 lots = $100 Per Pip

5.0 lots = $50 Per Pip

1.0 lots = $10 Per Pip

.5 lots = $5 Per Pip

.1 lots = $1 Per Pip

.05 lots = $.50 cents Per Pip

.01 Lots = $.10 cents Per Pip

.01 is the smallest lot size you can possibly bet which is 1/100th of a standard lot size. So essentially, by betting a standard lot of 1.0 you are placing a bet 100 times the size of .01

Putting it all together + How Big Should Your Trades Be In Respect to Pip Movements and Your Account Size

So let’s give you a few real-world examples and scenarios. Let’s say, for the sake of this example you start with an account size of $1,000 dollars. And being an intelligent Forex Trader who respects the markets, understands risk, and isn’t looking to gain social media clout, you want to practice proper risk management. That would mean you NEVER bet more than 2% of your account size on one trade.

2% of $1,000 dollars is $20 dollars on a single trade. That doesn’t mean you can only be in only 1 trade at any given time, that simply means you can only bet $20 dollars per trade because some will win and others will lose. So you could technically be in 10 trades at once (equalling $200 dollars at risk) but they’re all separate trades and have different possibilities. However, you should NEVER risk 20% of your entire account ($200) on one trade. Make sense?

Remember this, PROCESS is always more important than Short-Term Profits. This requires discipline, to follow, the same process of risk management over and over and over again.

Example:

Let’s say the (USD/CAD) US Dollar/Canadian Dollar is currently trading at 1.31050 and you want to place a long trade (betting that the market will go up) to 1.31550, meaning it’s a 50 pip move.

You’ve got $1,000 dollars in your account and want to risk $20 bucks in the hopes that you will make $40 bucks (2 to 1 Reward/Risk Ratio).

So if you place a .01 lot size, you would only make $5 bucks and probably risk $2.5 to make that. Meaning, this lot size is too small.

What if we moved that .01 lot size to 1.0? Now, on a 50 pip move, that would be the equivalent of 500 bucks because 1.0 lot size is the equivalent of 10 bucks per pip movement. That would be far too big of a bet, putting half of your account at risk.

A fair lot size to place would be .1 which would be the equivalent to $1 dollar for every pip movement.

This means if you’re right, and the market does move up (like you thought it would) then you would essentially make $50 dollars.

If you follow good Risk Management Practices, you would be in a trade with a 2 to 1 Reward/ Risk Ratio. So essentially you would set your stop loss so you only lose $25 dollars if you’re wrong. In this example, you would have a risk of 2.5%

This takes some time to get used to, but in reality, its not hard math, just simple addition, subtraction, and multiplication. Once you place enough trades, you’ll start getting used to seeing certain numbers and you’ll be able to do a quick calculation in your head about how many pips a move is when you’re doing your analysis and charting.

If you want to learn more about setting proper Take Profits and Stop Losses with good Reward/ Risk Ratios, you may want to Check Out this Article I recently Published.

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