Pips, Lots and Leverage Explained (With Canadian-Dollar Examples)

Forex has its own vocabulary, and most beginner mistakes come from misunderstanding four ideas: how pairs are quoted, what a pip is worth, how big a "lot" is, and what leverage really does. Here they are, using Canadian dollars throughout.

How currency pairs are quoted

A pair shows how much of the quote currency (second) buys one unit of the base currency (first).

• USD/CAD = 1.4168 means one U.S. dollar costs 1.4168 Canadian dollars.
• If USD/CAD rises to 1.4250, the U.S. dollar has strengthened and the loonie has weakened.
• Buying USD/CAD means buying U.S. dollars and selling Canadian dollars; you profit if the rate rises.

You'll always see two prices: the bid (what you can sell at) and the ask (what you can buy at). The difference is the spread — the broker's built-in fee on spread-only accounts.

What is a pip?

A pip is the standard unit of price movement: 0.0001 for most pairs and 0.01 for pairs quoted in Japanese yen. If USD/CAD moves from 1.4168 to 1.4178, it has moved 10 pips.

Pip value = position size × pip size, in the quote currency.

For pairs whose quote currency isn't CAD — EUR/USD, for instance — the pip value is in U.S. dollars and must be converted to CAD. At USD/CAD 1.4168, a pip on 10,000 EUR/USD is about C$1.42.

Lots

• Standard lot: 100,000 units of the base currency
• Mini lot: 10,000 units
• Micro lot: 1,000 units

Canadian dealers such as OANDA let you trade any number of units; MetaTrader brokers usually use lots with 0.01 (a micro lot) as the minimum.

Leverage and margin

With leverage, you post a margin deposit and control a larger position. At a 3.33% margin rate (30:1), 30,000 units of USD/CAD — worth about US$30,000 — needs roughly US$1,000 of margin.

Leverage doesn't change how much a pip is worth. It changes how big a position your deposit allows. That's the danger: with high leverage, it's easy to open a position whose normal daily moves are larger than your account can absorb. See leverage rules in Canada.

Putting it together: a worked example

You have a C$2,000 account and want to buy USD/CAD at 1.4150 with a stop-loss at 1.4120 (30 pips) and a target at 1.4210 (60 pips). You're willing to risk 1% — C$20.

• Risk per pip allowed: C$20 ÷ 30 pips = C$0.67 per pip
• Position size: C$0.67 ÷ 0.0001 = about 6,700 units
• If the stop is hit: −C$20 (plus spread)
• If the target is hit: +C$40 (minus spread)
• Margin at 30:1: about US$223, roughly C$316

The position uses a small fraction of available margin — which is exactly right.

Costs to account for

• Spread / commission: paid on every trade.
• Overnight financing (swap): positions held past the 5 p.m. ET rollover are credited or debited based on the interest-rate difference between the two currencies, minus the broker's markup.
• Conversion: P/L in a currency other than your account's is converted, sometimes with a fee.

Next: learn to size every trade by risk with the position size calculator.