Forex Basics: Pips, Lots and Leverage

Getting started · 5 min read · October 2026

Currency trading has its own vocabulary, and misunderstanding it is expensive. Here are the mechanical foundations — no strategy, just the machinery every forex trader must understand first.

Currency pairs

Currencies trade in pairs: EUR/USD, GBP/JPY, USD/CHF. The first currency (base) is what you buy or sell; the second (quote) is what you pay with. Buying EUR/USD means buying euros while selling dollars — you profit if the euro strengthens against the dollar. Majors (pairs with USD) are the most liquid and cheapest to trade.

Pips

A pip is the standard unit of price movement — usually 0.0001 (for JPY pairs, 0.01). If EUR/USD moves from 1.0850 to 1.0870, that is 20 pips. Pips are how traders measure everything: stops, targets, and performance.

Lots and position value

A standard lot is 100,000 units of the base currency; a mini lot is 10,000; a micro lot is 1,000. On EUR/USD, one pip on a standard lot is worth roughly $10; on a micro lot, about $0.10. Beginners should live in micro lots until consistency arrives — the market will still be there when you size up.

Leverage and margin

Leverage lets you control a large position with small capital — 1:100 leverage means $1,000 controls $100,000. It magnifies profits and losses equally. Margin is the deposit your broker locks as collateral. The danger is not leverage itself but what it tempts: position sizes your account cannot survive. Use leverage as a capital-efficiency tool, then apply strict position sizing as if the leverage did not exist.

Master the machinery first. Strategy comes second — and it only works on top of mechanics you fully understand.