To further understand Forex trading you need to know the basics of what makes a trade. Pips and Spreads are from the most basic and important parts of it.




A pip (percentage in points) is the difference in value between currencies. Each pip is a unit used to measure how many units have changed in the price.



The pip is the last one or two decimal places in a quote.



Quotes usually have four decimal places, with the exception of the Japanese Yen which includes only two. Quotes with five decimal places are there to display the fraction of a movement in price in a pip.



Example, the GBP/USD pair moved from 1.5154to 1.5154this change will be displayed showing the movement of 1/10 of a pip. In this presentation of 5 decimal places the number would have to move from 1.51542 to 1.51552 in order for the whole of 1 pip to have moved.



A four digit number however can only display the number of whole pips and not fractions of them, so let’s use the same GBP/USD pair, and say it moved from 1.225to 1.2251, then it has moved one whole pip, or numerically 0.0001.



The amount of pips between the bidding price and asking price is known as the Spread. Through spreads the broker or moneymaker makes their profit. Every time you open and close a position no matter your wins or losses, companies make their money through the spreads.



There are fixed spreads, meaning they don’t change no matter what changes the price may go through, fixed spreads with an extension, meaning parts of the spread are fixed while other are changeable, and variable spreads which change according to market movements.



Narrower Spreads (less difference between ask and bid price) will cost you as the trader less, so choosing fixed spreads guarantees that you will always be trading with the same spread, however variable spreads are more risky but when they get narrower you save more money, while when they get wider you spend more money.