Spreads, Pips and Lots: What You Pay
Every forex trade has a cost baked into the price, measured in pips across lots. Understand spreads, pips and lot sizes and you will know exactly what a trade costs before you place it.
Three small words, pip, spread and lot, describe almost everything about what a forex trade costs and how much it can make or lose. Get comfortable with them and the numbers on your screen stop being a mystery.
What is a pip?
A pip is the standard unit of price movement, almost always the fourth decimal place of a currency pair. If EUR/USD moves from 1.1000 to 1.1001, that is one pip. For pairs involving the Japanese yen, a pip is the second decimal place. Pips are how profit, loss and cost are all measured.
What is the spread?
The spread is the gap between the price you can buy at and the price you can sell at, measured in pips. It is the broker’s built-in charge on every trade. A 0.8 pip spread on EUR/USD is tighter, and cheaper, than a 1.5 pip spread. You pay it the moment you open a position, which is why your trade starts slightly in the red.
Lot sizes explained
- A standard lot is 100,000 units of the base currency.
- A mini lot is 10,000 units.
- A micro lot is 1,000 units, ideal for beginners.
The lot size sets how much each pip is worth. On a standard lot of EUR/USD, one pip is worth about 10 US dollars; on a micro lot, about 10 cents.
Putting it together: the cost of a trade
Say you trade one mini lot of EUR/USD with a 1 pip spread. One pip on a mini lot is worth about 1 US dollar, so the spread costs you roughly 1 US dollar to enter that trade. Multiply by your lot size and the spread to estimate the cost of any position before you place it.
Spread vs commission accounts
Standard accounts fold the cost into a wider spread. Raw or ECN accounts offer very tight spreads but charge a separate commission per lot. Active traders often prefer raw accounts; occasional traders may find standard accounts simpler and cheaper overall.
How to keep costs low
- Trade major pairs, which have the tightest spreads.
- Avoid trading around major news, when spreads widen.
- Compare the all-in cost of spread plus commission, not just one number.
- Watch swap charges if you hold positions overnight.
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This guide is for educational purposes only and is not financial advice. Trading forex and CFDs carries a high level of risk and can result in the loss of all your capital. Most retail investor accounts lose money. Make sure you understand the risks and seek independent advice if needed before trading.