Take an example, you will see the buy price for EUR to USD is at 1.35640 and the sell price is at 1.35626. Subtract the buy and sell price and you are going to find .00014 as what you are left with. This is the spread or the difference between the price you buy and sell the currency.

This is not the end, however. After knowing the spread, you should also know the pip value of it and this is exactly the reason why you must know well about this term. Are you ready to move from spread to pip? Let’s check it out!

What is Pip

While spread talks about the difference between buy and sell price, pip is the smallest price change which a given exchange rate makes based on market convention or behavior. The most major currency pairs are priced to four decimal places and therefore, the smallest change is in the last decimal point. Not all pairs apply this, but mostly it is the equivalent of 1/100 of 1% or one basis point. A pip varies based on how a given currency pair is traded and the value of one pip can have completely different values depending on the pair and pricing condition.

Talking about pip value, you can go back to the previous example of spread. You see that you get the difference of buying and selling price in .00014 point. For the pip value is identified by the fourth digit after the decimal, then it is calculated as 1.4 pips.

Besides pip itself, you may want to know how Forex traders call 5 pips. In a slang term, 5 pips or 5 basis points is called nickel. This is equivalent of 0.0005 or 0.05%. Hopefully you are not getting confused with the term pip and nickel. It is not a problem for you to focus on understanding pip first, because you want to be the master of trading who definitely know even the smallest thing of the trade, right?

You are now done with pip and spread. As time passes, you as a newbie will have a lot better understanding towards them as you practice more and more. And before you start your Forex trading, it is good for you to read a little bit about some tips to be a successful trader:

• Know what you need. Every trader has their own risk tolerance because their needs is not the same. Do not be distracted with what other trader is doing that they use more money than you or they take a bigger risk than you.
• Choose your broker carefully. You can work by yourself with the pip and spread, but later. As a newbie, it is a better idea to have a broker who helps you with your trading at least at the beginning. Read some reviews on the most reliable Forex brokers to get the most suitable one.
• Focus on single currency pair. It looks cool when you can trade with pairs of currency, but again, later. As your skill improved, you can do that. For the near future, let’s play safe and focus only on single currency pair. Good luck, newbies!

Pros

• Better Pricing: FX quotes are a direct reflection of interbank market prices
• Narrower Spreads: Most brokers operating under this process offer spreads as small as 1.5 pips to 2 pips on major pair transactions
• A Better Feel: Variable spreads offer insight into market conditions. If spreads are narrow, there is plenty of liquidity to be had. However, if spreads are wide, all-around execution may not be as good as it is with light volume in the market

Cons

• Fluctuating spreads means that the costs of entry can vary. Sometimes the retail trader will pay two pips, while others can pay five pips, depending on market conditions
• Variable spreads mean that some strategies will be thrown out the door as stop and limit orders are subject to price availability and fixed spreads on charts