Spreads and pips

What is Spread?

For many beginner traders, there are usually some questions around spreads and how some accounts have low spreads and some accounts have high spreads. In this article, we will cover what spread and pips are to get a better understanding of these concepts.

A spread is defined as the difference between the bid and ask price of a currency pair. It is usually measured in pips, which is the smallest unit of price movement of a currency pair.

What are Pips/Pipettes?

"A pip is short for “point in percentage”. It is the standardised unit measuring a change (both gains and losses) of a currency pair in the Forex market.fxsoriginal

A pip measures the amount of change in the exchange rate of a currency pair, calculated using its 4th decimal (in JPY pairs, it is calculated using the 2nd decimal).

It is important to note that pips do not represent any actual cash value - that depends on the position size of the trade, which would affect the pip value.

Pipettes are fractional pips. It is 1/10 of a pip, usually calculated using the 5th decimal (in JPY pairs, it is calculated using the 3rd decimal).

This means that in EUR/USD, a movement from 1.14562 to 1.14572 is an increase of 1 pip. A movement from 1.14562 to 1.14563 would then be an increase of 1 pipette.

How to identify and calculate the spread?

Before looking at any spread, a beginner trader must understand the concept of bid and ask price.

The “bid” is the price at which you can sell the base currency, whereas the “ask” is the price at which you can buy the base currency. The bid and ask prices can usually be found at a corner of your MetaTrader 4 trading platform.fxsoriginal

As seen in the image above, GBP/USD has a bid price of 1.30523 and an ask price of 1.30533.

Given that 1 pip in a GBP/USD pair is in the 4th decimal place (0.0001), this would mean that this GBP/USD quote has a 1-pip spread in this case. (i.e. The number of pips between 1.3053 & 1.3052).

Alternatively, you can right click on the MT4 panel and select “spread” which will show you the spreads: fxsoriginal

It’s important to note too that there are accounts with fixed spreads and variable spreads. It all depends on your style of trading and no singular style is better than the other. Here’s an illustration of how the spreads on an account looks like.

Final thoughts

Please do note that most brokers offer at least two different account types. Standard accounts will typically have all costs included in the spread. For example, if you trade EUR/USD on a Standard account, you might be charged a spread of 1 pip, which is the total cost of opening the trade.

Other account types (and the name of those vary from broker to broker) might have very low spreads - as low as 0.0 - but place a commission charge instead. For example, if you trade EUR/USD on such an account, you might not pay any spread (i.e. zero spread), but will be charged a certain $ amount per Lot traded.

Therefore, it is important to carry out your own research and determine which broker will be best for you. Feel free to check out Axi’s live spreads here and find out more on how we keep our spreads low!