This ensures that the forex broker in question always makes a profit - regardless of which way the markets are moving.
The spread is an important topic of conversation in the world of Forex, not least because it determines how much you pay for the trade. In other words, the higher the spread, the more you indirectly pay in fees.
Before we examine how the spread is calculated in 'pips', let's look at a basic example to clear the fog.
- You are trading USD / CAD
- Your broker quotes a buy price of 1.31
- The selling price is 1.30
- This means that the difference between the buy and sell price is 0.76%.
As described above, you would pay 1.31 if you placed a buy order in USD / CAD - which means that you are confident that the pair will rise in price. Once the order is placed, you would be in the red by 0.76%.
Why? Well, if you want to sell your position, you have to do it at 1.30. Since this is less than what you paid, you will be immediately penalized by the spread as soon as you place an order. For this reason, it is important to choose a forex broker with low forex spreads.
What are pips in Forex?
Before we can get a complete overview of what the spread is and how it is calculated, we first need to learn something about it. 'Pips'. The reason for this is that in order to determine the width of the spread, we need to be able to quantify price movements in pips.
When we trade Forex online, we do so primarily to profit from extremely small price movements. Therefore, most forex pairs contain four decimal places. For example, GBP / USD might be at 1.3103. One of the few exceptions to this rule is USD / JPY, which has only two digits after the decimal point.
Nevertheless, if GBP / USD went from 1.3103 to 1.3104This would indicate a movement of 0.0001 USD. In the world of Forex terminology, this would be referred to as "1 pip". Similarly, if the price of GBP / USD went from 1.3103 to 1.3098This would be a movement of '5 pips'.
Calculating the Spead in Pips
So now that you know what that is spread, how also pips are calculated, we can now show you a real example of spread.
Example of Pips: Spread of EUR / USD
Let's say you want to trade EUR / USD and you want to go long. Therefore, you believe that the EUR will outperform the USD, which means that the exchange rate will increase.
- The purchase price is 1.1389
- The selling price is 1.1382
- With a difference of 7 digits, the spread is 7 pips
- You place a buy order at 1.1389, which means that you need to increase the price of EUR / USD by at least 7 pips to break even
As you can see from the example above, even though the buy price is 1.1389, the sell price would have to increase to 1.1389 before you can break even. Before this price is reached, you will have to exit your trade at a lower price than the one you paid.
What about pipettes in Forex?
Without confusing you further, you also need to understand what "pipettes" are. Similar to pips, pipettes refer to the ultra-small price movements of a Forex pair. While pips are based on 4 digits after the decimal point (2 in the case of USD / JPY), pipettes use 5 digits.
For example, instead of valuing GBP / USD as 1.4592 (4 digits), it might look something like 1.45927 (5 digits). As such, the movement of 1 pipette would be 0.00001 USD. Confused? Don't be, as the calculation works the same as pips, although you add an extra digit.
Example of pipettes: Spread of GBP / USD
In this example we will look at how We would calculate Forex spreads on GBP / USD when a broker uses pipettes.
- The purchase price is 1.31016
- The selling price is 1.31008
- With a difference of 8 digits, the spread is 8 pipettes
- You place a buy order at 1.31016, which means that you need to increase the price of GBP / USD by at least 8 pipettes to break even
In the above example, the forex spread of GBP / USD is 8 pipettes. Although the broker in question uses a pipette system (5 digits after the decimal point), the spread is always calculated in "pips". As such, the spread would therefore be 0.8 pips.
Note from trade-exness:"หากคุณพบนายหน้าเช่น ดาวน์โหลด mt4 exness ที่มี 0.8 pips สําหรับคู่ forex ที่สําคัญนี่คือการแข่งขันสูง. อย่างไรก็ตามตรวจสอบให้แน่ใจว่าคุณจ่ายค่าคอมมิชชั่นการซื้อขายใด!"
"If you find a broker that offers 0.8 pips for major forex pairs, this is highly competitive. However, be sure to check what trading commissions you have to pay!"
This looks so fun! We don't do one-on-one activities with our kids enough, but you've definitely made me want to, even if this post is about a family walk! Now that it's cooling down we like going on walks in the evening before bed, and it has been so nice just to get out of the house! We'll have to try those Clif bars! The Oatmeal Cookie one sounds amazing!
I've missed your blog. So happy that I thought to check out your fb page and come visit. I'm never disappointed. Your free printable is the cutest thing ever. My children would love to do this daily.
How about winter walks though, you participate in those?! ? Oh wait... You're in Arizona (or somewhere) with sunshine year round. It's about to be a blizzard mess with snow to my waist in a couple months!!! =) Lol
Monica, long time no see!! I'm glad to hear you're doing well! Haha we definitely don't have to deal with blizzards but we have the opposite, 115 degree summer days, so I feel ya on certain parts of the year being near impossible to go on walks. Actually I feel like our "winter" months are coming to an end and we can finally venture outside without it feeling like an oven haha! ?
We are big on family walks. All great benefits, especially getting some of that energy out, haha!
My kids and I love going on walks! But, our neighborhood isn't really the best for it. It isn't horrible, but it's not particularly safe either. I'm hoping that by this time next year, we will be in a new house and in a new, family-friendly neighborhood. Then we will be walking all the time!
I hope you are too Marietta! I could definitely understand that situation, I've lived in some places before that were safe but were just...questionable haha.
Hi Jessica! Family walks are the best ? We have some of the best conversations with the girls when we go on walks. We definitely need to do them more often
Thanks for sharing us,