Understanding the meaning of Pips and Spread in Forex Trading

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Many newbie Forex traders enter the Forex industry by default without knowing most of the common terminologies associated with the currency market.

Am talking about common Forex broker terms called Pips and Spread. These two states are important factors that may determine your overall success as a Forex trader.You need to fully understand they mean as a trader and how they are being employed especially with your broker.

Firstly, pips simply means Percentage in Points. In a simple explanation, it is the difference between two currency quotes. This quotes may be the difference between bid & ask price of a particular currency pair.

For example, say the bid & ask price for EUR/USD is 1.2836 & 1.2839. The difference between the two prices is 0.0003. Meaning 3 pips.

In another case, a trader may decide to enter a sell GBP/USD trade at 1.6044 for a profit target of 1.6011. If such a trade is successful and the price hits his Take profit, then he would have made a profit of 33 pips.

The spread is the different between the bid and ask price for a particular currency pair. Its an amount of pips that every Forex broker charges on their clients for every trade they place on the broker platform.

For example, InstaForex brokers charges a fixed spread of 3 pips for her top currency pairs.

Her currency quotes as at Saturday 3rd November 2012 are displayed below:

SYMBOL    BID           ASK

EURUSD        1.2836     1.2839,
GBPUSD         1.6024    1.6027,
USDJPY         80.43       80.46,
USDCHF         0.9403    0.9406

Forex brokers make their profits from the spread they charge their clients. The broker’s currency quotes containing the spreads are usually displayed on the broker’s website for their clients and traders to see.

Most brokers charges around 1 – 5 pips as their spread.

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