Pips and Spreads In Forex

A pip is the smallest unit by which a Forex cross price quote changes. So, in Forex
trading, if EUR/USD bid is quoted at 0.9767 and it moves up Forex 2 pips, it will be
quoted at 0.9769.

The spread is the difference between the bid and asking price. You will note that while
trading the currency market, there will also be a difference between the current value of
the currency and what you pay for it. That is spread and that is where the forex brokers
make their profit. Remember, because of this profit the brokers can offer you a forex
account for free - without any fees!

Let's say the current EUR/USD price is 1.27237 and your forex broker has a Forex 2 pip
spread, then you will pay 1.2739 when you buy. You will also note that the Forex 2 pip
spread is usually available for major currency pairs like EUR/USD, USD/JPY, EUR/JPY
etc.

Look at another example of Forex 2 pip spread: the GBP/USD pair is quoted at 1.9346
Bid and 1.9348 Ask, meaning that it would cost you 1.9348 to buy this contract (at this
moment) but you would only get 1.9346 if you sold it (at the same moment). These
quotes change frequently, as trades are made and new price levels are established.
Sometimes the changes are only seconds apart.
In the above example there is a 2 Pip difference in the Bid and Ask price, representing a
Forex 2 Pip spread. The spread in this contract is likely to remain the same for a very
long time; the spread difference does not normally change for a given foreign exchange
market.

Spread is accepted as a cost of doing business in Forex market. When your entry
transaction is made you have already sustained a paper loss equal to the spread. If you are
a buyer, your contract must appreciate by 2 Pips (in our example above) before you break
even. This is how the market maker makes money from the transaction. However,
without such a dealer facilitating the trade, you would never be able to trade.

Forex 2 pip spread can be offered by those brokers who have huge monthly trading
volume in forex market and have established liquidity relationships with the world’s top
forex banks. With the banking relationships in place the company can have access to over
$1 billion in market liquidity. Consequently the company is able to pass along even
smaller spreads like Forex 2 pip to most active trading customers.