What is a Pip?
One of the FOREX terms that you will come across very often from the very beginning of your Forex career is the term “pip(s)”
So what exactly is a pip? The literal definition is “percentage in points”. The pip is 1/100th or 1% of any spot rate and can also be regarded as the smallest increment of price movement.
The last number in the digits seen at the end of a Forex quote is the pip.
If the EUR/USD is trading at 1.1324, the “4” is the pip. If 1 hour later this currency pair is trading at 1.1329 that would be a 5 pip move, so a pip is 0.0001.
The pip is the 4th digit to the right of the decimal point in all currency pairings except pairings involving the Japanese Yen (JPY). With JPY pairings, the pip is the second digit after the decimal point.
What is the value of a pip?
The pip value varies from currency to currency depending on the relative value of the 2 currencies in the pair and the amount of cash being traded. The formula for calculating the pip value is: 1 pip (in decimal form: 0.0001) divided by the current exchange rate.
The only time that the pip value remains “static” is for the USD-quoted currency pairs. Examples of such pairs are EUR/USD, CAD/USD, CHF/USD, etc. The pip value for USD-quoted pairs is always $10 or 100,000 currency units for standard lots, $1 for mini-lots and $0.10 for micro lots.
Do you really have to worry about all these calculations? Fortunately, these calculations are almost always provided automatically by Forex broker.
What is a FOREX Spread?
I am sure you must have wondered at some point in time “how do the Forex brokers make money without charging commissions and other fees?” Forex brokers use the spread to make money on every trade placed within their network.
The spread actually refers to the amount of pips between the BID price and the ASK price, which are displayed with all Forex quotes. The BID (price at which trader will sell) is always lower than the ASK (price at which you would buy), and so your Forex positions always open with a slight loss. Naturally it would work in your best interest to seek brokers with the smallest possible spread.
Spread Example: EUR/USD spread
Ask is 1.1322 - Bid is 1.1326,
Spread is: 1.1326 – 1.1322 = 0.0004 or 4 pips.
The spread in this case is therefore, 4 pips. When you buy or sell this pair, the broker gets those 4 pips for taking the transaction for you.
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