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Introduction to PIPs, Quote, Spread, Long & Short Trade

Discussion in 'Forex Beginner Q&A' started by prav, Dec 12, 2008.

  1. prav

    prav Moderator
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    Pip stands for “percentage in point” and it represents the smallest change in price that a currency pair can make. In other words, it is the last digit in the value of a currency pair. If the EUR/USD moves from 1.5230 to 1.5232, it rises by 2 pips.
    Most currency exchange quotes have 4 digits after the decimal places, only the Japanese yen is quoted out to 2 decimal places. So, USD/JPY would move by two pips for example from 108.11 to 108.13.

    Quote
    The quote records the value of one currency in terms of another currency. The currency on the left side of a currency pair is called the base currency and the currency on the right is called the counter currency. A quote indicates how much worth one unit of the base currency is in terms of the counter currency. For example, EUR/USD quoted at 1.5102 means that 1 Euro can be purchased for 1.5102 American dollars.

    Spread
    Currency quotes are expressed in two prices, a bid price (buy) and an ask price (sell). For example, an online forex broker will show the quote of the Euro as something like 1.5102/1.5105. You can buy the base currency (enter a long trade) at the bid price (1.5102 in our example). You can sell the base currency (enter a short trade) at the ask price (1.5105). The difference between the bid and the ask price is called the spread. The spread is in fact a hidden commission paid to a broker. So, if the bid price of EUR/USD is 1.5102 and the ask price 1.5105, you automatically pay the spread of 3 pips from every trade to your broker.

    Long Trade & Short Trade
    If you expect the base currency to appreciate, you want to buy it and then sell it back at a higher price. In the forex jargon, buying a currency is called “taking a long position” or simply “going long”.

    If the base currency is expected to depreciate, you can sell it now and buy it back later, at a lower price. Selling a currency is called “taking a short position”, “going short” or “shorting”.
     
    #1 prav, Dec 12, 2008
    Last edited: Feb 8, 2009
  2. sevaratna

    sevaratna New Member

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    I detected a mistake. It says: If the EUR/USD moves from 1.5230 to 1.5432, it rises by 2 pips. The correct is: from 1.5430 to 1.5432. Thanks.
     
  3. Sayen Aylen

    Sayen Aylen New Member

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    Hello,
    I went through the article it says that If the EUR/USD moves from 1.5230 to 1.5232, it rises by 2 pips and its correct.
     
  4. Fxtrader88

    Fxtrader88 New Member

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    The amount of spread is extremely important for scalpers, because they open lots of deals and have to pay spread for evey trade. That's why I prefer floating tight spreads for the major pairs. For example, FreshForex offers such spreads. The spead on EURUSD is from 0 pips.
     
  5. sininfinity

    sininfinity Active Member

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    Agree with you. For scalpers it is an absolute necessity to get as low spreads as possible. Increasing trading cost is not good for them and they should work on every pips they can get their hands on.
     
  6. Mistalee

    Mistalee New Member

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    Yeah...! I was also making the same mistake. This article cleared my doubt. Thanks for sharing it here.
     
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