Pips & Spread in Online Forex Trading

by : Nelson Woolwine

The first thing you must understand in forex trading is the spread and the pips. Each currency is traded against another one. This is called a currency pair. An example for a popular pair with high daily trading volume is EUR/USD.

The EUR/USD exchange rate is one of the most traded contracts in the world. In total the forex market trades around $2 trillion Dollars every day but there are only a few currency pairs that are traded with high volume.

When you want to trade this pair then you need to know the spread and the value of a pip. The spread is the difference of the buy and sell price. For example you want to buy the Euro against the Dollar. The current price that your trading platform displays is 1.5000 x 1.5003. That means there are 3 pips spread.

You can buy the Euro at 1.5003 but sell it only at 1.5000 right now. The price of the currency pair is constantly changing. The spread can also change. The spread will get bigger with more market activity for example. Your broker is the one who earns the spread. He widens the spread when he has more risk and reduces the spread when the risk for the broker becomes smaller.

You have no other choice than paying the spread. There are brokers that offer zero spread trading but that is often an illusion. The broker makes the pricing and he can give you any price he wants. The price you see may have no spread but you can be sure that you pay a price for it some way.

Other popular currency pairs are GBP/USD, USD/JPY and CHF/USD. Your trading platform may have dozens of pairs available but do not forget that only the major currencies provide enough volume and volatility for day trades.