Ever wondered how Brokers made their money, through the spread, which is the commission of the broker. However, they are very small in Forex than when compared to currency spread at banks, (This will be clarified later).
This is where you’ll hear a lot of pip and pips. you’ve probably encountered those terms more than you can possibly take it anymore, you are still to hear the term over and over.
It is the smallest price moment in Forex Trading, of a traded currency – in most cases, it is referred to as a point. One of the most important aspects to fully understand is PIPS – this is what will be used to calculate your profit and loss.
Don’t be surprised by seeing a lot of 0.0001 or 1/100 of a cent, that’s because for most currencies a pip is as such. Now let me blow your mind, say for example when a currency moves from 1.2345 to 1.2348, how many pips does it have? 3 (Three) pips. Now if a pip value is $25, You have gained $75.
The Spread works hand in hand with PIPS – which has one of the most important aspects for the trader. Remember the difference between the quotation pair (or between Bid Price and ASK Price) that is what we talking about, The Spread.
Let’s assume EUR/USD is quoted at 1.2342 bid and 1.2345 ask, which gives the difference of 3. Remember the difference between the BID and ASK is the Spread, and this gives a spread of 3 pips.
In the example above it shows you sustained a paper loss equal to 3 pips the moment you started trading, is this good? As explained in What is Forex Trading – that it is a contract, well, in this case, your contract has to appreciate by 3 pips before you break even.
It is important for a trader to know that the lower the pip spread the easier it is for you to profit.
In General, the more activity and bigger the market affects the pip spread, in this case, the pip spread will be very low and the opposite.
Brokers offer spreads for different currencies, bigger accounts will have smaller spreads and smaller accounts will generally have higher spreads.