A beginners’ guide to PIPs and Spreads?

If you are just starting with Forex trading, you might have come across numerous terms difficult to understand. There are some specialized jargons that you must make yourself familiar with. Yes, knowing the actual concepts helps a lot and eventually it makes you a better trader.

Let’s get started!

What does a PIP mean?

PIP stands for Price Interest Point. It is the smallest unit for measuring the amount of change in exchange rate that can occur in a currency pair in Forex market. Almost all the pips in currency pairs are displayed to four decimal places. One pip is equal to 0.0001. For example, EUR/USD currency pair price might change from 1.4120 to 1.4121 to get one pip movement.

But, Yen based currency pairs are measured for up to two decimal places only. In this case, a pip is measured in 0.01 not 0.0001. The best example to understand a pip change in Japanese yen with USD currency pair would be USD/JPY - 108.22 to 108.23.

Another important thing for you to remember is that not all pips are equal. The value of a pip generally depends on denominating currency in a currency pair. A 100-pip rise in CAD/USD is same as a 100-pip rise in GBP/USD as both are rise to a US cent. But, if denominating currency is different then a pip won’t have same value. For example, a 100-pip rise in USD/CHF is a rise of 1/100 of a Swiss Franc and not of US cent.

Let’s understand Spreads now

Spread is a difference between buy price and sell price. In another term, it is the difference between bids and ask price. Practically, a broker buys from a trader at a certain price and sells the same to a trader at different price. This difference is – Spread.

For example, in USD/EUR bid/ask currency rate can be 1.2040/1.3040 in the Forex market. It represents a spread of 1000 pips (1.3010-1.2040).

Relation between pip and spreads

Pip and spreads are closely related. This is because the spread is measured in pips only.

The buy orders are executed at higher asking prices and sell orders are executed at lower bid prices. Hence, a trader selling currency immediately after buying will lose money. This is because bid is lower than the ask price in Forex market. Hence, it is advisable for traders to invest in smaller spreads as little change in exchange rate will help to increase profits in trade easily.

Money lost by traders with lose of spreads is gained by brokers helping them to make profits. This is the reason Forex brokers generally don’t charge commission from traders as profits build in each trade in lost spreads.

Aspiring traders should acquire knowledge about trading procedure, market conditions, analysis, and other technicalities required in Forex trading. Most importantly, a trusted and skilled broker needs to be hired to provide guidance and supports to trade successfully in Forex market.

Ready to start trading now?

If you are looking to start trading right away, you can rely on Vinson Financials for tightest spreads in the market. There’s no long process to sign up with us. Simply start with a demo account, get the virtual currently to trade with and when you are confident enough switch to a real account.

Happy trading!

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