What is a PIP in FX Trading?

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What is a PIP spread?

The PIP spread is the gap between the rate you sell a currency at compared to what you can buy the same currency for. You can see this by examining the table below.

The Sell rate for the EUR/USD is 1.3087 vs. a buy rate of 1.3090. The difference is 3 PIP which represents the PIP spread. The PIP spread is your cost in entering the transaction. In the 3 PIP example above, if you buy the EUR/USD the rate has to move 4 PIPS up (0.004) before you begin to profit. The first 3 PIP movement covers the spread and the additional 1 PIP movement is your profit. The smaller the spread the less the cost is for you to enter the trade. A zero spread represents a costless transaction.

Do all exchange rates have the same PIP spread?

Different exchange rates trade with different spreads. The most popular traded currencies, such as the EURO/USD, trade with the smallest spread (usually 3 PIPs). Less traded currencies attract a higher spread (usually up to 5 PIPs). Exotic exchange rates are rates that are rarely traded and incur the highest PIP spread sometimes up to 9 PIPs.

Can I buy any amount of a currency?

Currencies are traded in LOT amounts. The LOT amount represents the minimum amount that can be traded in a currency. For entry level bronze accounts, the minimum lot is 1,000. For silver and up the minimum LOT amount is 100,000. The maximum lot size is 200,000. For example, if you have Bronze account 1 LOT amount is 1000 units of the base currency. Using the USD/EURO example, say you buy 1 LOT with a LOT amount of 1000 at 1.309 and you sell 1000 lots after the currency moves up to 1.317 your profit would be (1.317-1.309)*1000 = $8. Using the same example, but assuming the LOT minimum was $100,000 your profit would be (1.317-1.309)*100,000 = $800.

Published on 12th of April 2011
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