|FOREX PIPS & Spreads - The Brokers Commission|
FOREX PIPS & Spreads - The Brokers Commission
The PIP is the smallest measure of price move used in FOREX trading. For instance, if the currency pair EUR/USD is trading at 1.3000 and then changes to 1.3010, the pair is said to move by 10 PIPS. It is an acronym for Percentage in Point (pip).
In the wholesale market, currencies are quoted out to four decimal places, with the last placeholder called a point or a pip. A pip in most currencies is one/10,000th of an exchange rate or in USD/JPY, it is one/100th, likewise you can find for others.
Spread on the other hand is the difference between buy (long) or sell (short) for a currency pair. The bid/offer spread is the difference between the buying (bid) and selling (offer) price. The ask prices are the immediate execution prices for quick buyers or traders and bid prices are for quick sellers.
In Forex market you will find brokers who generally do not charge any commission from you. But they get their money by charging you a spread. As spread is the difference between the bid price and the ask price for any currency being traded, the broker will add this spread onto the price of the trade and keep it as their fee for trading.
Wider spreads will result in a loftier asking price versus a slashed bid price. The consequence is that you have to pay more when you buy and get less when you sell. This spread is charged only on one side of the transaction, usually on the "buy" side of the trades. To find out which brokers offer the best PIPS and spreads read our Forex broker reviews.
If the quote between EUR/USD is said to be 1.2222/4, the spread equals 2 PIPS as the difference between 2 and 4 is 2. But if the quote is 1.22225/4, the spread is 1.5 PIPS. So spread is the primary cost of trading for you and in differences in them makes a big impact.
Although it may not seem like much of a difference to be trading with a 5 pip spread vs. a 4 pip spread, it can add up very quickly when you multiply it with how many trades you make and how much money you're trading. You will find the difference to be as high as 25% on your trading costs.
Spreads affect the return on your trading strategy in a big way. As a trader your sole concern is buying low and transaction high. Wider spreads mean buying higher and having to sell lower. A half-pip lower spread can even affect your profitability.
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 most popular currency pairs like the EUR/USD or GBP/USD you will get the typical lowest spreads, while for currencies that have less demand will be traded with higher spreads.
The spreads will vary depending on the types of accounts. A mini account may have higher spreads than a full contract account.
It is important to realize that as the spread is the difference between bid prices and ask prices as determined by the free market they are not always guaranteed. So with a fluctuating market when the spreads widen, you will be charged with that wider spread. Spreads are tighter when there is good market liquidity but it will widen as liquidity dries up.
Forex spreads are only meaningful when they are supported with good execution. For example, when you find a tight spread, but your trade is filled a few PIPS in the wrong direction, or your transaction is rejected, you are in trouble.
It means that your broker is showing tight spreads but in effect delivering wider spreads. Be aware of such rejected trades, and delayed execution, which are strategies to deceive the traders.