Pips and spreads show the value of a currency pair to the investor and to the broker.
What is a pip?
A pip is a number value. In the Forex market, the value of currency is given in pips. One pip equals 0.0001, two pips equals 0.0002, three pips equals 0.0003 and so on.
One pip is the smallest price change that an exchange rate can make. Most currencies are priced to four numbers after the point. For example, a five pip spread for EUR/USD is 1.2530/1.2535.
In the major currencies, the price of the Japanese yen does not have four numbers after the point. In USD/JPY, the price is only given to two decimal points – so a quote for USD/JPY looks like this: 114.05/114.08. This quote has a three pip spread between the buy and sell price.
What is the spread?
The spread is the difference between the buy (also called bid) price and the sell (also called ask) price. Two prices are given for a currency pair. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.
If a trader buys any currency and immediately sells it – and no change in the exchange rate has happened – the trader will lose money. The reason for this is that the bid price is always lower than the ask price.
For example, the EUR/USD bid/ask currency rates at your bank may be 1.2015/1.3015. This represents a spread of 1000 pips. This spread is very high compared to the bid/ask currency rates for online Forex investors, such as 1.2015/1.2020 – a spread of 5 pips.
In general, smaller spreads are better for Forex investors because a smaller movement in exchange rates lets them profit from a trade more easily.
The spread is where the market maker will make their money. See Easy-Forex® trading features for information on our spreads.
Source: Easy Forex