Forex Pips & Spreads

Have you ever wondered what is a PIP and I am not talking about a PIP in an olive or something like that.

A pip is the name given to the smallest measure of price move used in Forex market. For example, if the currency pair GBP/USD is trading at 1.6410 and then changes to 1.6415 that means that the pair has moved by 5 pips.

According to the text book definition a PIP is an acronym for Percentage in Point (pip), or basically the movement of the fourth digit after the decimal point.

It is important to note that in most currencies a PIP is the movement of the fourth digit after the decimal point but in Yen crosses it is the movement of the second digit after the decimal point.

Ever heard of a spread? Stop thinking about food

The spread is the difference between the bids and ask price that your broker quotes you. For example if your broker is quoting you a 1.6410-1.6412, then you are paying a commission of 2 pips. In other words you are paying a spread of 2 PIPS.

In Forex market you will find that brokers do not normally charge their commission via a percentage based format, either they charge you just the spread. A spread is the difference between the bid price and the ask price for any currency being traded. The broker will either deduct the spread from your account balance or from your position when opening a new trade.

How low can they go?

Well, it really depends with whom you are trading with.

Obviously you are going to want the lowest spreads possible no? Well, most brokers will give you their best spreads according to the type of account you open or according to the amount of volume you trade (how many trades you open). The reason for this is because they profit from the spread, so the more you trade the more they profit.

Fractional spreads

Some brokers add another digit onto the bid/ask price allowing them to charge fractional spreads. For example you might see a broker give you a quote on the GBP/USD that looks like the following 1.64645-1.6465. This basically means that the spread is only half a pip. Sounds good no?

Well most brokers that provide fractional pips do not normally give a fixed spread, this basically means that the spread will tend to fluctuate according to the market’s activity. So you might see your spread at 0.5 pips and then a second later at 5 pips. That is a big increase and a high commission to pay.

Remember that spreads affect the returns trades enormously, especially if you are day trading, trying to only grab a few pips at a time. If you are only in for a quick trade and are interested in only profiting 20 pips a day, a 5 pip commission would shrink your profits dramatically.

Choose a Low Spread Forex Broker

As mentioned above spreads can vary based on the currencies you're trading and what type of account you open. Most brokers will be offering different spreads for different currencies. For the major currency pairs like the EUR/USD or USD/JPY you will tend to get tighter spreads as are classed as more liquid currencies. For more exotic currencies your spreads will normally be quite high.

To find out which brokers we recommend with the best services and spreads simply ask for a recommendation on our site http://www.dodjit.com/