What are the terms “spread” and “pip” in currency trading, and how they detremine cost of trading?
When making a trade (for forex, stocks, options, etc.) there is a bid price and and offer price. The bid price is the price you can sell your currency for and the ask (sometimes called offer) price is the price you can buy it for. The bid will almost always be lower than the ask – so if you buy and sell it right away, you will lose a little money. The difference between the two is how the broker and liquidity providers make money. That difference is called the spread. **************************************… A pip is the smallest price increment in forex trading – pip stands for percentage in point. Prices are quoted to the fourth decimal point in the forex market – for example EUR/USD might be bid at 1.1914 and offered at 1.1917. In this example we can see that the spread is 3 pips wide. The Japanese Yen (JPY) is an exception – it is quoted only to the second decimal point.
