Contract Specifications: Pips, Lots and Position Value
This lesson defines the pip and the lot, shows how pip value is derived from contract size, and demonstrates the calculation of monetary risk on a position.
Risk note: educational content only. This article is not financial advice, investment advice, or a recommendation to buy or sell any instrument. Trading leveraged products can result in losses greater than expected, and each reader should understand the risks before trading.
Every position has a monetary value that depends on the size of the contract and the unit in which price movement is measured. A trader who cannot state the value of a one-pip movement on an open position is unable to quantify the risk carried by that position, and no quality of analysis compensates for this omission. This lesson defines the pip and its subdivision, describes the standard lot sizes used in foreign exchange and the contract sizes used in other markets, derives the pip value of a position, and demonstrates the calculation of the amount at risk from the stop-loss distance.
The pip as the unit of price movement
A pip, an abbreviation of percentage in point, is the standard unit in which the movement of a currency pair is measured. For the majority of currency pairs, which are quoted to four decimal places, one pip corresponds to the fourth decimal place: a movement in EUR/USD from 1.1000 to 1.1001 is a movement of one pip. For pairs in which the Japanese yen is the quote currency, which are quoted to two or three decimal places, one pip corresponds to the second decimal place.
The MetaTrader 5 platform quotes an additional decimal place beyond the pip, commonly termed a pipette or fractional pip. A quotation of 1.10005 therefore lies half a pip above 1.1000. The distinction matters when stop-loss and take-profit orders are entered in points on the platform, since a distance specified as 400 points on a five-decimal quotation corresponds to 40 pips, not 400. Confusing the two units results in orders placed at one tenth of the intended distance.
Lots and contract sizes
A lot is the standardised quantity of the underlying asset represented by one unit of position size. In foreign exchange, one standard lot represents 100,000 units of the base currency, the first currency in the pair. A mini lot represents 10,000 units and a micro lot represents 1,000 units. On the platform these are expressed as volumes of 1.00, 0.10 and 0.01 respectively. The minimum trade size at Onys Kapital is 0.01 lot, equivalent to one micro lot.
Instruments other than currency pairs use contract sizes specific to the market concerned. An index CFD, a commodity CFD and an equity CFD each define one lot differently, and the definition determines the monetary value of each unit of price movement. The contract size for every instrument is published in the specification accessible from the Market Watch window in MetaTrader 5 and on the trading conditions page. The specification should be consulted for each instrument rather than assumed from experience of another.
Deriving pip value and monetary risk
The pip value of a position is the change in the position's value produced by a one-pip movement in price. It is calculated as the contract size multiplied by the pip size, converted into the account currency where the quote currency differs from it. For EUR/USD traded on a USD-denominated account, one standard lot of 100,000 units multiplied by a pip size of 0.0001 gives a pip value of USD 10. A position of 0.10 lot has a pip value of USD 1, and a position of 0.01 lot has a pip value of USD 0.10.
The monetary amount at risk on a position is the product of the stop-loss distance in pips and the pip value. A position of 0.10 lot on EUR/USD with a stop-loss order 40 pips from the entry price therefore carries a risk of 40 × USD 1 = USD 40, excluding the spread and any slippage on execution. This figure should be known with precision before every order is submitted.
- 1.00 lot on EUR/USD: approximately USD 10 per pip.
- 0.10 lot on EUR/USD: approximately USD 1 per pip.
- 0.01 lot on EUR/USD: approximately USD 0.10 per pip.
- Amount at risk = stop-loss distance in pips × pip value.
Deriving position size from acceptable risk
Experienced participants seldom select a lot size first. The procedure followed in professional practice is to determine the maximum monetary loss acceptable on the trade, to identify the price level at which the trading rationale is invalidated and at which the stop-loss order must therefore be placed, and to derive the position size from those two quantities. Position size = acceptable risk ÷ (stop-loss distance in pips × pip value per lot).
If the acceptable risk is USD 50 and the stop-loss distance is 25 pips on EUR/USD, the position size is 50 ÷ (25 × 10) = 0.20 lot. This sequence ensures that the risk on each trade is fixed by the trader rather than dictated by an arbitrary volume. The profit calculator on the Onys Kapital website performs these calculations for each instrument and account currency, and it should be used to verify manual calculations until the procedure is familiar.