Forex Trading Basics – Forex Quotes, Pips & Spread

Understand what is forex pips and spread and how it works. These are very important measure of success in forex trading.Pips is the basic measurement use in forex trading to measure price movement. Pip is the smallest price movement in forex trading and pip stands for the acronym percentage in point. If you bought EUR/USD at 1.3123 and you sold it at 1.3126 you earned 3 pips, you get that when you subtract from your selling price (1.3126) your buy price (1.3123) and the equivalent dollar of every pip depends on your trade lot size, micro lots is the smallest lot size 1 pip equals $0.10 per pip, next is mini lots and 1 pip equals $1.00 per pip and for standard lots 1 pips is equal to $10.00.To better understand how forex quotes works let us assume on the following sample quote price for EUR/USD (Euro Dollar); EUR/USD buy price 1.3123, sell price 1.3120, you can then buy EUR/USD at 1.3123 and look to sell it above this price and every changed to the upside of the last digit equals 1 pip. Did you notice the difference between the buy price and the sell price? This is called forex spread.Most of the best forex brokers do not charge you commission or broker’s fee this is because they earn through the spread. The answer is through the spread, which is why one of the selling points of forex brokers is offering low spread to their client. Once you enter a trade you will immediately suffer a loss amounting to the spread of the currency. Example if you buy EUR/USD at 1.3123 you already have a loss of 3 pips since you can only sell this at 1.3120. The 3 pips initial loss actually goes to your broker and works like a broker’s fee.Our first example is a buy transaction it will also be the same when you sell short a currency pair. Selling short EUR/USD at 1.3123 will give you the same 3 pip loss because when you close your short trade you will have to buy it at 1.3120.Are we charged with the forex spread every time we enter a trade? The answer is yes, every time you enter a trade you are charged by your broker with the spread and your broker will collect this amount the time you close your trade, that is selling if you initially bought and buying if you initially sell short.There are times when the forex currency spread shoot up to the roof especially during times that the market is very volatile like when trading news announcement like NFP and rate interest adjustments or in times when the market is still digesting an economic news or information.Now start talking in terms of pips when you measure profit or loss in forex trading or when you are describing a currency price range. Look for brokers that offer fix spread or offer small spread when you trade with them. Never trade right after a news announcement because you might be paying your broker a very high spread.

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