Forex Spreads And Pips In Currency Pairs

Forex Spreads And Pips In Currency Pairs

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.