Pips, Spread & Quote Forex :

Pips, Spread & Quote Forex :

Forex Quotes
You are abroad and you want to exchange one currency for another. Let's say you are in the US and you want to exchange your euros for US dollars. At the exchange window you have then displayed on a screen what is called a quotation.
In our example, Euro against Dollars (EUR USD in jargon) is displayed at 1,3752. Which means that if you exchange 1 euro, you will in return 1,3752 dollars.

What is a Forex Pip?
The last digit, the fourth decimal place (the "2" of 1,3752), is the smallest possible difference of dimension. This is called in the jargon a "pip" (pronounced "pipe" in French).
If the price of the EUR USD climbs from 1,3752 to 1,3753 then the price has gone up by 1 pip.

This is the commonly used unit to talk about the amplitude of course movements and the gains you will be able to achieve.

However there is one exception, it is all pairs related to the Yen. Indeed, our Japanese friends do not have (unlike other currencies) cents. For example the Euro Yen (EUR JPY in jargon) is now at 126.14. In this case, the smallest difference of possible dimension is to the second decimal place and not to the fourth. So if the price of the euro yen drops from 126.14 to 126.12 then the price has dropped by 2 pips.

What is the spread?
Supply and Demand
In the same window you have noticed that there is a difference in rating between buying and selling. Indeed, if you wish to exchange euros for dollars, or dollars against euros the quotation is not the same. The tables have 2 columns: one for the ASK (request) and one for the BID (bid).

For example, if the table shows 1,3755 in the ASK column and 1,3752 in the BID column, then there is a difference of 3 pips between buying and selling. In the Forex market, this difference is called the spread. This is the commission that the broker (broker in the jargon) will touch on your transaction.

Principle of a Forex Trading:
You open a purchase order at 1,3752 on the EUR parity. 30 minutes later the course is worth 1.3792 and you will close your position.

What is happening ? First, it can be noted that the price rose by 40 pips (1.3792 - 1.3752 = 0.0040). You have to subtract the spread of 3 pips (the commission of the broker), you therefore generated a net profit of 37 pips.