Forex spreads on major currency pairs fluctuate as often as the price-value of currency can fluctuate. In the forex market, currency pairs are always quoted with ISO abbreviations located at www.iso.org/iso/en/prods-services/popstds/currencycodeslist.html.

So, you will see something like: GPB/USD (British pound to U.S. dollar) or EUR /CHF (Austria euro to Swiss franc). The first abbreviation is the base currency and the latter is the quote currency. So GPB/USD would specify the amount of U.S. dollars it takes to buy one monetary unit of British pounds. It would also specify the opposite --- how many US dollars are received when you buy one British pound.

Since the currency exchange rate is based on the currency pair, the trade occurs based on a bid price of one currency to the ask price of the other currency unit. The bid price is generally lower than the ask price and signifies the value received when one unit of the base currency is sold. The ask price is given when purchasing a currency pair and signifies the amount that must be paid in the quote currency to receive one unit of the base currency.

The forex spreads are the difference between the bid and ask price. This is the amount that a broker will receive for brokering the trade---almost in the same manner as traditional stock broker commissions, but based on the bid and ask price of investors.

Forex spreads are always calculated by pips. Pips are counted as one at the fourth decimal point and then adding one from that point. A pip 0.0001 is one pip; 0.0002 is two pips; 0.0003 is three pips and so forth.

Forex spreads and pips will change based on several factors, so it is very important for you to research the broker’s guidelines and ‘fine print’ before selecting a broker or brokerage firm.

Be aware of a factor that influences forex spreads and pips: The amount being traded. Higher trade amounts mean lower pips; lower trade amounts mean higher pips. The currency exchange rate can impact the value of the monetary unit and therefore the value of the spread. More risky or uncommonly traded currency pairs have higher pips. The broker can change pips and spreads based on the size of their firm and the financial institution backing the broker.

The smaller the pips and tighter the forex spreads, the more opportunity you have to earn value and less payouts go to the broker/brokerage firm.

About LifeTips

Now one of the top on-line publishers in the world, LifeTips offers tips to millions of monthly visitors. Our mission mission is to make your life smarter, better, faster and wiser. Expert writers earn dough for what they know. And exclusive sponsors in each niche topic help us make-it-all happen.

Exclusive Sponsor

Greetings,

Forex Club is excited to announce a special program. When you open a new trading account we will deposit $100 on it to help you to get started with Forex trading. Since there are no fees to open an account, in essence, this means that you can start actual forex trading without spending a single dollar. Sounds like a pretty good deal, does not it? This is way better than a demo account. You can find out details about this promotion program here: http://www.fxclub.com/incentive

Thank you for your interest and good luck!
Forex Club, New York

Ask a Question

Not finding the advice and tips you need on this Forex Tip Site? Request a Tip Now!

Guru Spotlight

Kristle Jones

Ever wonder how you could make your life better and more fun? So have tens of millions of fans who have turned to LifeTips for answers over the past decade. We keep the tips, advice, books, podcasts and writing services flowing, so you can keep your life and business growing in the right direction. Upward!