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What are a spread and a pip (point) on the exchange market?

What are a spread and a pip (point) on the exchange market?

Spread – is a difference between the bid and the ask price of a currency on the Forex market. On top of that, it is the key source of profit for companies that provide brokerage services.

Spread – what is it?

There are always 2 price types on the Forex market — the bid price and the ask price of a certain currency. So, every participant of the market is either a seller or a buyer of currencies. A seller tries to offer the higher price and a buyer tries to purchases a currency at the lower price.

The ask price is also called just ASK, and the bid price – just BID. The difference between the bid price and the ask price is called “spread”. Traders know about 2 types of a spread:

  • Fixed;
  • Floating.

When a trader opens an order, a position immediately goes negative for several pips. That’s what is called Forex spread taken by a brokerage company. Its size is entirely dependent on the liquidity – in other words, it depends on the popularity of a certain currency pair. The higher the trading volume of a certain currency pair, the lower the size of a spread.

How to calculate the value of a Forex pip?

One pip — is a minimal price change unit. Currency quotes with 4 decimal places — is a standard display of prices of all currency pairs except for JPY. In the case of JPY, there are only 2 decimal places indicated in quotes. So, in order to calculate the value of one pip you should use the following formula:

Value of one pip = (lot size * pip) / market price.

Forex pip is calculated without much effort – just don’t forget that you should indicate a lot in the base currency units.

Many brokerage companies offer clients to use special Forex pips calculators integrated in their web-sites. These calculators can automatically calculate a pip value – a trader only has to select a currency pair, a transaction volume and a deposition currency. So, FxPro traders in their reviews mention the easiness of usage the point value calculator of this broker which shows up-to-date and accurate data.

Spread types

Fixed spread. When the Forex trading first appeared, all brokers were offering their customers to trade with a fixed spread only – that is a fixed number of pips charged for every opened order. The size of a spread was individually selected for each currency pair – it was defined by a broker in its sole discretion. Fixed spread is beneficial for those traders, who use trading advisors or scripts. We shouldn’t forget that some brokerage companies can increase a spread along with the publication of important economic news or when something essential happens in the world stage. These conditions are usually indicated in the contract with a brokerage company.

Floating spread. It is the most demanded spread among the experienced traders. This type of a spread represents a changing value expressed in pips that can vary from 0.1 p. to 50 p. In their trading conditions, brokers usually indicate minimum value of a spread which can then be increased. This type of a spread is suitable for those traders who trade on Forex by their own and always make a deep study of the market situation before they enter it.

What is spread rebate?

Some brokerage companies offer their clients to use a function of partial or full spread rebate. But most often that is nothing but cheating, because spreads bring profits to brokerage companies and the last thing they want is to part with their income. Such rebate offerings and campaigns are possible, but in most cases they are temporary and held only with the purpose to attract new customers.

If you trade on Forex, then trade only with proven brokerage companies. In case a company takes no spread or it is too high, it is not worth to invest your savings in such company: there is a major risk to run into a scammer.

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