Pips, lots, leverage and margin: the maths of every trade

Many beginners blow their accounts not because their analysis was wrong, but because they didn't understand how much money each price move costs. This lesson is the arithmetic of forex. Run every calculator, change the numbers, and don't move on until it feels easy.

Pips and points

A pip ("percentage in point") is the standard unit for measuring price changes.

Most brokers show one extra decimal, a pipette or point (1/10 of a pip): EUR/USD 1.08503. If a platform says "10 points", that's usually 1 pip. Always check what your platform means by "points".

Gold, oil and indices have their own conventions (gold is often quoted to two decimals, and a $1 move in gold is often called "100 points" or "10 pips" depending on the broker). Confirm with your broker's contract specifications before trading them.

Lots: the size of your position

Beginners should think in micro lots (0.01). A 0.01 lot on EUR/USD moving 100 pips is about $1. A 1.00 lot moving 100 pips is about $1,000. Typing "1" instead of "0.01" is a classic, expensive mistake.

Calculator 1: pip value and profit/loss

def pip_size(pair):
    return 0.01 if pair.endswith("JPY") else 0.0001

def pip_value_usd(pair, lots, price):
    """Value of one pip in US dollars for a position (account in USD)."""
    units = lots * 100_000
    value_in_quote = units * pip_size(pair)      # pip value in the QUOTE currency
    quote = pair[-3:]
    if quote == "USD":
        return value_in_quote                     # e.g. EUR/USD: already in USD
    if pair.startswith("USD"):
        return value_in_quote / price             # e.g. USD/JPY: convert quote -> USD
    raise ValueError("For crosses, convert with the quote currency's USD rate")

def profit(pair, lots, entry, exit_price, direction="buy"):
    pips = (exit_price - entry) / pip_size(pair)
    if direction == "sell":
        pips = -pips
    return pips, pips * pip_value_usd(pair, lots, exit_price)

for pair, lots, entry, exit_price, d in [
    ("EURUSD", 0.10, 1.0850, 1.0880, "buy"),
    ("EURUSD", 0.01, 1.0850, 1.0800, "buy"),
    ("USDJPY", 0.05, 150.20, 149.70, "sell"),
    ("GBPUSD", 1.00, 1.2700, 1.2650, "buy"),
]:
    pips, usd = profit(pair, lots, entry, exit_price, d)
    print(f"{d:4} {lots:.2f} lots {pair}: {pips:+.1f} pips = {usd:+.2f} USD")

Look at the last line: one standard lot, a 50-pip move against you, −$500. On a $200 account, that position would have been wiped out long before reaching 50 pips.

Leverage and margin

Leverage lets you open a position much bigger than your deposit. The broker asks you to put up only a fraction as margin (a security deposit), and lends the rest of the exposure.

Key ideas:

• Leverage doesn't change how much a pip is worth. Position size does. Leverage only changes how big a position you're allowed to open.
• High leverage makes it easy to open positions far too large for your account. That's the danger.
• Regulators in many countries cap retail leverage (e.g. 1:30 on major pairs in the EU and UK) because high leverage harms retail clients. Some offshore brokers offer 1:500 or more; that's a warning sign, not a benefit.

Margin terms

Calculator 2: margin, margin level and stop out

balance = 200.0          # USD account
leverage = 100
lots = 0.50              # too big for this account, on purpose
price = 1.0850           # EUR/USD
stop_out_level = 50      # percent; check your broker's real figure

notional = lots * 100_000 * price
used_margin = notional / leverage
pip_value = lots * 100_000 * 0.0001       # USD per pip for EUR/USD

print(f"Position size: {notional:,.0f} USD; margin used: {used_margin:,.2f} USD")
print(f"Each pip is worth {pip_value:.2f} USD")

for pips_against in (0, 10, 20, 30, 40):
    equity = balance - pips_against * pip_value
    level = equity / used_margin * 100
    flag = "STOP OUT: trades closed" if level <= stop_out_level else ""
    print(f"{pips_against:3} pips against: equity {equity:7.2f}  margin level {level:5.0f}%  {flag}")

A move of about 30 pips (which can happen in minutes during news) closes this account's trade with most of the money gone. Now change lots to 0.01 and run it again: the same 30 pips costs $3.

Spread, commission and swap: the costs

Islamic (swap-free) accounts exist for clients who can't pay or receive interest; check how the broker replaces swap (sometimes with a fee).

Costs look small per trade, but frequent trading adds up. A strategy that makes 3 pips per trade on average can be destroyed by a 1.5-pip spread plus commission.

Calculator 3: what costs do to frequent trading

trades_per_month = 60
avg_gross_pips = 2.5        # average result per trade BEFORE costs (optimistic)
spread_pips = 1.2
commission_pips = 0.7       # commission expressed in pips
lots = 0.10
pip_value = 1.0             # USD per pip for 0.10 lots EUR/USD

net_pips = avg_gross_pips - spread_pips - commission_pips
print(f"Net per trade: {net_pips:.1f} pips")
print(f"Monthly gross: {trades_per_month * avg_gross_pips * pip_value:,.2f} USD")
print(f"Monthly costs: {trades_per_month * (spread_pips + commission_pips) * pip_value:,.2f} USD")
print(f"Monthly net:   {trades_per_month * net_pips * pip_value:,.2f} USD")

Accounts in KES vs USD

Some Kenyan brokers offer accounts in KES as well as USD. If your account currency differs from the pair's quote currency, profits are converted, and exchange-rate changes and conversion fees affect your balance. Know your account currency and how deposits and withdrawals are converted.

Summary

• A pip is 0.0001 on most pairs and 0.01 on JPY pairs; check what your platform calls "points".
• 1.00 lot = 100,000 units ≈ $10/pip on EUR/USD; 0.01 lot ≈ $0.10/pip. Beginners use micro lots.
• Leverage lets you open bigger positions with less margin; it magnifies losses and can trigger a stop out quickly.
• Equity, free margin and margin level tell you how close you are to a stop out.
• Spreads, commissions and swaps are real costs; they can turn a small edge into a loss.