Understand Trading Spreads

If you are new in forex trading, you may not be familiar with the vocabulary used in the world of forex. Few times even the easiest concepts can have concealed complexities- this is same the case with spreads and Pips.

What does Pip express in Trading?

A pip is known to be an incremental price movement which carries a specific value which is dependent on the considerable market. In simple words, it is the standard unit of measurement for recognizing the change in value in the exchange rate.

Originally, pip was considered as the smallest that would be done to a FX price. However, with the arrival of other precise pricing methods, this original definition does not hold importance. Traditionally, FX prices had been quoted for a set of decimal places that most commonly include four decimal places. A pip was originally considered as a one point movement in the last decimal place that has been quoted.

Many brokers are now known to quote forex price for an extra decimal value. However, it may now be clear that pip is no longer the final decimal place value. It continues to be a standardized value across various platforms and among different brokers which makes it an important unit of measure. Without such a unit of measure, there are chances that apples would be compared to oranges. When considering generic points pip certainly holds relevance. This measuring unit is essential for margin calculation at various points.

What is Spread?

In forex trading, the spread is the difference between two things. the difference in the ask/bid/buy/sell price that is offered by the broker to the potential traders.

Spreads are usually of two types, Fixed spread and variable spread;

WVariable Spread

In forex trading, a variable spread is a uniformly changing price between the bid and ask prices. In simple words, the spread you spend on buying a currency pair changes as of things such as demand, supply as well as total trading activity.

What influences the spread in forex trading?

There are various factors which can affect the spread. Some factors are;

  • Market liquidity
  • Market volatility
  • market uncertainty
  • Time of day

Each forex trader should pay significant attention to spread management. High performance and results can only be obtained when a high quantity of market conditions is taken into consideration. A strong trading technique is based on a proper evaluation of the specific financial condition and market indicators of a deal. Spreads tend to fluctuate, spread management policy must be flexible enough to settle to market movement.



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