Pip and the Bid-Ask Spread
New investors should be aware of the difference between the bid price and the ask price of those currency pairs in FX trading. This is just a normal market condition. For example, in stock trading, in the real time streaming of stock quotes, there is also a difference between bid-ask prices.
What is Pip?
In the forex market, the smallest unit used to quantify the movement in the currency quote is called “a pip”, and the difference between the bid-ask prices is called “spread”. Generally speaking, in EUR/USD, the fourth decimal place is the pip unit, while in USD/JPY, due to the pricing of Japanese Yen, the second decimal place is the pip unit.
When the EUR/USD appreciates from 1.1840 to 1.1849, we could say that the euro was up 9 pips against the dollar. When it comes to the spread cost, the spread of EUR/USD from forex brokers is about 3 pips or less. This means that, for the standard contract, the spread cost for 1 contract (commonly defaulted as 100,000 units) is $30.
Why is there an extra decimal place in the currency pairs quotation?
In the forex market, as mentioned above, a pip is the minimum change in price movement, but most trading platforms now display an extra decimal place on the quote, which may cause misunderstanding of the traditional definition of 1 pip.
In fact, this is related to the development of the financial markets. Since the financial crisis 2008, the technology and communication network have become more and more advanced, and mind-boggling amounts of data can be processed at the same time efficiently. In addition, financial companies generally attach great importance to information technology developments, so that now brokers can be inter-connected to the forex market in many ways. With faster and more efficient transfers of data information, the market quote has become more refined and can offer 1 / 10 units of 1 pip, making the spread narrower correspondingly.
This is a benefit for investors because a narrower spread means less trading cost. To present, the competition among forex brokers is still fierce, so most of them quote this extra decimal place to clients. As a result, investors may interpret 1 pip differently over time.
What is a Basis point?
A Basis point, also known as BP, might be mistaken as pip by investors that are new to forex. In practice, a basis point will not be used in forex trading because it is used to describe changes in bonds and interest rates.
A basis point equals 0.01%. For example, after the meeting of FOMC, when it comes to rate hikes or rate cuts, 25-basis-points is often mentioned in the Fed’s decision. Apart from the BP and PIP, Tick and Point are also very common in expressing price movement, but it may be easy for newbies to misunderstand those differences between them.
Next Article: 23. What is pip value?
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Risk Warning: The above content is for reference only and does not represent ZFX’s position. ZFX does not assume any form of loss caused by any trading operations conducted in accordance with this article. Please be firm in your thinking and do the corresponding risk control.