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Introduction to Forex – Chapter III. – Pips and Spreads

Tuesday, Dec 16 2014
Introduction to Forex – Chapter III. – Pips and Spreads

In the previous Chapter, we have explained what Leverage is and how pricing works in Forex.  When talking about leverage, question of Pip immediately raises. Pip stands for Percentage in Points. Most of our currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price what is commonly referred to as a ''pip''. For example, if EUR/USD currency pair is 1.23235, the 4th decimal place, in the case 3 is a pip. Now, if this pair moves to 1.23345, it is said that it has climbed by 11 pips. In addition to that if you are buying 100 000 EUR/USD at 1.23235, with this price movement you would earn $110,00. 
 


However, when you think about your profit you must also take into account so called Spread. Spread is the difference in the BID/ASK (BUY/SELL) of the currency pairs. For example if EUR/USD is currently being traded at 1.23235/1.23243, the spread in this case is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places, so USD/JPY price of 97.41/97.44 displays a 3 pip spread. Spreads can go from just 0.1 pips to huge amounts of over 30 pips in some so called exotic pairs. However, in major Forex pairs spread is always within 5 pips. 
 
This leads us to the next chapter in which we will say more about Forex major and minor pair. 

Last modified on Saturday, 01 April 2017
More in this category: « Introduction to Forex – Chapter II. – Leverage and Pricing Introduction to Forex – Chapter IV. - Major and minor Forex pairs »

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