If you are just starting out in forex trading, you may be finding it hard to make sense of all of the specialized vocabulary. Even the most basic concepts can have hidden complexities – this is certainly the case with pips and spreads.
A pip does measure the change in value of a currency – it is the smallest price change that any currency can make. Most pips are equal to a 0.0001 price change. For instance, the EUR/USD currency pair price might change from 1.4030 to 1.4031 – this is a one-pip movement.
However, there is an exception to this definition of a pip. Where a currency has a low unit value, the price is only quoted to 2 decimal places, not 4. In this case, a pip is 0.01 rather than 0.0001. The best example of this is the Japanese yen – if the USD/JPY currency pair increases from 104.22 to 104.23, this is a one-pip change.
The other important thing to remember about pips is that not all pips are equal. The value of a pip is tied to the denominating currency in a currency pair. Therefore, a 100-pip rise in CAD/USD is the same as a 100-pip rise in GBP/USD – both are a rise of one US cent. However, when the denominating currency is different, then a pip does not have the same value. For instance, a 100-pip rise in USD/CHF is a rise of 1/100 of a Swiss franc, not one US cent.
Buy orders are executed at the higher ask price, while sell orders are executed at the lower bid price. This means that if a trader buys and then sells immediately, they will always lose the amount of the spread. Because of this, forex traders generally look for low spreads, since the spread is the equivalent to a tax – although a private one – on each transaction.
Of course, the money that traders lose on spreads has to go somewhere. In fact, the spread ends up with the market maker or broker – this is where they make their profits. This is also why forex trading typically doesn’t involve commissions, since the broker’s profit is already built into each trade.
What does a pip mean?
You may have come across terms such as making 400 pips of profit, which would seem to indicate that a pip is some sort of currency value. However, the situation is actually a little more complicated than that.A pip does measure the change in value of a currency – it is the smallest price change that any currency can make. Most pips are equal to a 0.0001 price change. For instance, the EUR/USD currency pair price might change from 1.4030 to 1.4031 – this is a one-pip movement.
However, there is an exception to this definition of a pip. Where a currency has a low unit value, the price is only quoted to 2 decimal places, not 4. In this case, a pip is 0.01 rather than 0.0001. The best example of this is the Japanese yen – if the USD/JPY currency pair increases from 104.22 to 104.23, this is a one-pip change.
The other important thing to remember about pips is that not all pips are equal. The value of a pip is tied to the denominating currency in a currency pair. Therefore, a 100-pip rise in CAD/USD is the same as a 100-pip rise in GBP/USD – both are a rise of one US cent. However, when the denominating currency is different, then a pip does not have the same value. For instance, a 100-pip rise in USD/CHF is a rise of 1/100 of a Swiss franc, not one US cent.
How does this relate to spreads?
When the price of any currency pair is quoted, there are actually two prices. The first is the bid price – this is how much is being offered for the currency pair. The second is the ask price – how much sellers are asking. The difference between the two is called the spread and is measured in pips.Buy orders are executed at the higher ask price, while sell orders are executed at the lower bid price. This means that if a trader buys and then sells immediately, they will always lose the amount of the spread. Because of this, forex traders generally look for low spreads, since the spread is the equivalent to a tax – although a private one – on each transaction.
Of course, the money that traders lose on spreads has to go somewhere. In fact, the spread ends up with the market maker or broker – this is where they make their profits. This is also why forex trading typically doesn’t involve commissions, since the broker’s profit is already built into each trade.
Editors’ Picks
EUR/USD clings to small gains near 1.1750
Following a short-lasting correction in the early European session, EUR/USD regains its traction and clings to moderate gains at around 1.1750 on Monday. Nevertheless, the pair's volatility remains low, with investors awaiting this weeks key data releases from the US and the ECB policy announcements.
GBP/USD remains confined in a range above mid-1.3300s ahead of UK jobs report
The GBP/USD pair extends its sideways consolidative price move through the Asian session on Tuesday and currently trades around the 1.3370-1.3365 region, nearly unchanged for the day. Traders seem reluctant and opt to wait for this week's important macro releases and the key central bank event risk before placing fresh directional bets.
USD/JPY stays in the red below 155.00 amid BoJ rate hike bets, US data awaited
USD/JPY holds moderate losses below 155.00 in the Asian session on Tuesday. The Japanese Yen gains ground on expectations that the Bank of Japan will raise interest rates at the upcoming policy meeting on Friday. Traders will closely monitor key US data, including Nonfarm Payrolls, Retail Sales, and Purchasing Managers Index, which are due later in the day.
Editors’ Picks
AUD/USD falls toward 0.6600 amid risk aversion
AUD/USD drops toward 0.6600 in Asian trading on Tuesday, as recent mixed Australian labour market data and renewed concerns about the health of the Chinese economy undermine the Aussie amid a softer risk tone and a pause in the US Dollar decline. Traders now look to the delayed US NFP report for some impetus.
USD/JPY stays in the red below 155.00 amid BoJ rate hike bets, US data awaited
USD/JPY holds moderate losses below 155.00 in the Asian session on Tuesday. The Japanese Yen gains ground on expectations that the Bank of Japan will raise interest rates at the upcoming policy meeting on Friday. Traders will closely monitor key US data, including Nonfarm Payrolls, Retail Sales, and Purchasing Managers Index, which are due later in the day.
Gold defends $4,300 as focus shifts to US NFP, PMI data
Gold price holds the $4,300 level, easing from the highest since October 21 in the Asian trading hours on Tuesday. The precious metal stays afloat on further US Federal Reserve rate cut bets. The US Nonfarm Payrolls report will take center stage later on Tuesday. Also, the US Retail Sales and Purchasing Managers Index will be published.
Top Crypto Losers: Aster, Midnight, and Ethena extend losses as selling pressure mounts
Aster, Midnight, and Ethena are the altcoins with the most losses over the last 24 hours, as the broader cryptocurrency market weakens amid Bitcoin dropping below $86,000.
NFP preview: Complex data release will determine if Fed was right to cut rates
The long wait is over, and the Bureau of Labor Statistics in the US will release nonfarm payrolls reports for both November and October at 1330 GMT on Tuesday. The overall NFP figure for October is expected to be -10k, however, it is expected to be influenced by a massive 130k drop in federal department workers.
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