Understand what is forex pips and spread and how it works. These are very important measure of success in forex trading.

Pips and Lots

Pips is the basic measurement use in forex trading to measure price movement. Percentage in point of PIP is the smallest price increment in forex trading. Pip is always measure by the last digit in forex price quotes, say you bought EUR/USD at 1.3123 and was able to sell it at 1.3126, you then earn 3 pips which is the difference between the sell price and the buy price. Every pip has a dollar equivalent depending on the lot size a trader is trading. Micro lot 1 pip is equal to $0.10, a mini lot 1 pip is equal to $1.00 and a standard lot 1 pip is equal to $10.00.

Reading Forex Quotes

To better understand how forex quotes works let us assume on the following sample quote price for EUR/USD (Euro Dollar); Sell price 1.3120 and Buy price 1.3123, this quote means that you can buy EUR/USD at 1.3123 and you can sell it or short sell it at 1.3120. Did you notice the difference between the buy price and the sell price? This is called forex spread.

Understanding Forex Spread

Most forex brokers do not charge that client with commission fees or brokers fees, how then do the forex brokers earn when we trade with them? Forex brokers sell their services not only via their platform but most especially by offering lower spread or fix spread. Once you enter a trade you will immediately suffer a loss amounting to the spread of the currency. Example if you buy EUR/USD at 1.3123 you already have a loss of 3 pips since you can only sell this at 1.3120. The spread actually goes to the pocket of your broker as their income.

This also works the same way when you sell short a currency, the price you pay to sell short EUR/USD in our previous example is at 1.3120, just like your buy order in your sell order you are already at a loss amounting to the spread for a currency.

Every time you enter a trade whether buying or selling short a currency pair you are charged by your broker via the currency pair spread, this is just once every time you enter a trade and when you close a trade this is actually the time when you pay your broker the spread.

During volatile times in the market spread can move from your regular 1-3 pips to 10-50 pips in just seconds this kind of movement happens in anticipation of a great move or when there are favorable or unfavorable economic news that just become available to the market.

Use pip in measuring your profit or loss or when measuring risk and reward of a trade. Take advantage of brokers that offers small spread or better yet guaranteed fix spread. Avoid buying or selling during wild movement of price because you increase the risk of getting charge with a high spread.

Lots more revealed about Forex trading fundamentals by checking out LiteForex broker. You may also learn more about silver investing.

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Filed under: Currency Trading

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