How Forex Trading Works

How Forex Trading Works

To trade forex you need to understand three things: pips (how price moves are measured), lots (how much you're buying), and spread (the cost of every trade). Let's break each one down in plain English.

What is a Pip?

A pip is the smallest normal price movement in a currency pair. Look at EUR/USD moving from 1.0847 to 1.0848 — that tiny jump of 0.0001 is exactly 1 pip.

• Most pairs: 1 pip = 0.0001 (4th decimal place)
• JPY pairs (e.g. USD/JPY): 1 pip = 0.01 (2nd decimal place)

What is a Lot?

A lot is the size of your trade — how many currency units you're buying or selling. Bigger lot = bigger profit AND bigger loss per pip.

• Standard Lot — 100,000 units — each pip = $10 — for professionals only
• Mini Lot — 10,000 units — each pip = $1 — for intermediate traders
• Micro Lot (0.01) — 1,000 units — each pip = $0.10 — perfect for beginners

Worked Example

EUR/USD moves 30 pips in your favour. You traded a micro lot (0.01):

Profit = 30 pips × $0.10 = $3.00

That might sound small — but on a £500 practice account it's the right size to learn with real-feeling risk.