If you read GBP/USD commentary or open a trading platform, three units come up constantly: pips, lots and leverage. Here is what each means, with GBP/USD as the worked example.
Pips: measuring movement
A pip is the standard unit of movement for a currency pair. For GBP/USD it is the fourth decimal place — 0.0001. So a move from 1.2700 to 1.2701 is one pip; 1.2700 to 1.2750 is 50 pips. Many platforms also show a fifth decimal, the “pipette” or fractional pip, for extra precision. Pips let traders discuss moves in a consistent way regardless of the size of their position.
Lots: measuring position size
FX is traded in lots. The conventions are:
- Standard lot: 100,000 units of the base currency (here, £100,000).
- Mini lot: 10,000 units (£10,000).
- Micro lot: 1,000 units (£1,000).
The lot size sets how much each pip is worth. On a standard lot of GBP/USD, one pip is worth about $10; on a mini lot about $1; on a micro lot about $0.10. So a 50-pip move on a standard lot is roughly $500.
Leverage and margin
Leverage lets a trader control a large position with a small deposit (the margin). At 30:1 leverage, controlling a £10,000 mini lot requires only a few hundred pounds of margin. Leverage cuts both ways: it multiplies gains and losses by the same factor. A move that would be trivial on an unleveraged position can wipe out a leveraged one, which is why retail leverage is capped by regulators in many countries and why most retail FX accounts lose money.
Why this matters even if you never trade
Understanding pips makes financial news intelligible: when a report says “Cable fell 80 pips after the jobs report”, you now know that is a move of 0.0080 — for example from 1.2700 to 1.2620. It also puts the mid-market vs retail gap in perspective: a typical bank markup of a few percent dwarfs the pip-sized moves traders obsess over.