Forex PIPs and Spreads
In the FX trading world, a pip is considered a point for calculating profits and losses.
PIP stands for Point In Percentage or Percentage in Point, and denotes the smallest price change or price movement for a traded currency. The value of a pip varies depending on your forex trading account currency.
Most major currency pairs (excluding Japanese yen) in forex trading are priced to four decimal places, making a pip equivalent to 0.0001 or 1/100 of one percent. When a currency changes in value from 1.2410 to 1.2413, it will have moved 3 pips.
Typically, currency trading occurs in lot sizes of 100 000 units of the base currency, meaning that a movement of 1 pip equates to 10 units of the quoted currency.
The difference or amount of pips between the bid price and ask price for a trade is known as the spread. The spread is used as a means for forex brokers to make money on currency trades placed through their network, without having to charge commissions.
For example, the forex broker may have a bid price on USD/EUR of 130.00 and an ask price of 130.05. The bid price denotes what they are willing to buy the base currency USD for in exchange for EUR, and the ask price indicates what they are willing to sell the base currency USD in exchange for EUR. In this example the spread is 0.05.
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To get started with Forex trading you essentially need three things: trading knowledge, a market broker or trading platform, and some money to start trading with.
In forex trading, the margin is what the forex broker requires you to put up in order to open a trading position, like a good faith deposit.