Basic trading terms: pip, lot, spread, leverage, margin and swap

Many beginners take their first loss not because their analysis was wrong but because they did not know how much "one lot" really was. Let us go through six essential terms.

1. Pip

The smallest standard unit of price change: the fourth decimal in most pairs and the second in yen pairs.

Example: EURUSD moving from 1.0850 to 1.0870 is a 20-pip move. In gold, each $0.10 move is usually counted as one pip.

2. Lot

The unit of trade size:

• 1 standard lot = 100,000 units of the base currency, about $10 per pip
• 0.1 lot (mini) = about $1 per pip
• 0.01 lot (micro) = about $0.10 per pip

So one lot of EURUSD moving 20 pips makes or loses about $200.

3. Spread

The difference between the ask and the bid. The moment you open a trade you are down by the spread, and spreads widen around news and in quiet hours.

4. Leverage

1:100 leverage means $1,000 can control a $100,000 position. High leverage is not the danger; large position size is. You can trade carefully even at 1:500 if you size correctly.

5. Margin

The part of your balance the broker locks as collateral to keep a trade open. If open losses grow and your margin level hits a set threshold, you get a margin call, and positions are then closed automatically (stop-out).

6. Swap

The overnight cost or credit for holding a position, based on the interest-rate gap between the two currencies. It is usually tripled on Wednesday night. Islamic accounts have no swap.

A full example

Balance $1,000, leverage 1:100, buying 0.1 lot of EURUSD with a 1-pip spread and a 20-pip stop:

• Margin required: about $108
• Spread cost: about $1
• Maximum loss at the stop: about $20, or 2% of the account

Find dozens more definitions in our forex glossary.

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Trading financial markets involves risk. This article is educational and is not investment advice.