2.2 - Dicing with Spreads and Pricing

In Forex trading, for each currency pair displayed, two similar sets of prices are often indicated. These are the buy and sell prices- otherwise known as the ‘ask’ and ‘bid’ rates. The difference between these two values is called the ‘spread’.

The spread is often where your broker will ‘price in’ or include the cost of their transaction fees. These fees are calculated to the nearest decimal point at the rate of your trade and are frequently measured in ‘pips’. This way brokers don’t have to charge a set fee for each transaction.

Currencies are commonly priced as a value of five numbers. So, in the example below for the USD pairs, the decimal point appears after the one in but with GBPJPY it’s three figures in. This is because the Japanese Yen price has such a large whole number, only two decimals are used – keeping it to a five-figure format.

One pip, represents a value of one in the number placed furthest to the right. So let’s say the rate on GBPCAD was trading at  1.5500 and it went up 25 pips… We’d be seeing a rate of 1.5525 GBPCAD.

No prizes for guessing here – the word “Pip” helped inspire the name of our app, Pipster.

Traders use pips because prices may only shift by a very small fraction of a per cent. When you’re more experienced in trading, you can increase the effectiveness of this small percentage movement by using multipliers – we’ll discuss this in the next section.

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