FX Spreads Explained

Rasfi

Private
Messages
16
Forgive my ignorance but I just need quick explanation on a specific question relating to spreads.

I was comparing spreads, but here is my problem. I thought a pip was the last digit of a currency pair, so when I was comparing spreads different brokers were offering different spreads on the same pair no problem so far except I got little bit confused which spread is better, give you example:

Broker A: 0.9 GBPUSD

Broker B: 1 GBPUSD

Broker C: 1.8 GBPUSD

Broker D: 0.4 GBPUSD

Now in terms of numerology 1 is a whole number greater than a fraction number of 0.4, but pips represent points, "pip" stands for "percentage in point," or a percentage of the smallest currency unit. So I'm trying to get my stupid head around this, If I buy 1 lot GBPUSD at 1.5820 and the spread is 0.4 and the market moves 4 pips up, does that mean have paid the spreads?
 

Pharaoh

Colonel
Messages
19,729
Your question is a good one. Most forex education material is based on 4 digit pricing, where the last digit is pips. Over the last few years, more and more brokers have gone to 5 digit pricing. This has lead to massive confusion, when someone freaks out over 12 pips slippage that's really only 1.2 pips.

So, classic 4 digit prices would be like 1.1234/1.1233 meaning 1 pip spread.
5 digit prices would look like 1.12345/1.12335 meaning 1.0 pip spread

Note: JPY pairs have 2 digits after the decimal under 4 digit pricing and 3 digits under 5 digit pricing.
 

Rasfi

Private
Messages
16
Your question is a good one. Most forex education material is based on 4 digit pricing, where the last digit is pips. Over the last few years, more and more brokers have gone to 5 digit pricing. This has lead to massive confusion, when someone freaks out over 12 pips slippage that's really only 1.2 pips.

So, classic 4 digit prices would be like 1.1234/1.1233 meaning 1 pip spread.
5 digit prices would look like 1.12345/1.12335 meaning 1.0 pip spread

Note: JPY pairs have 2 digits after the decimal under 4 digit pricing and 3 digits under 5 digit pricing.
Most forex education material is based on 4 digit pricing, where the last digit is pips.

Yes that was what I thought, the last digit to be a pip, and now you telling me otherwise. I could not believe it when I first sow almost 50 pip spread with the 5 digit pricing at alpari MT4.

Anyway spread of 0.4 or 0.9 pip is equivalent to what? Is there such a things like, less than a pip or pip fraction?

I'm still trying to get my head around how 5 digit pricing is calculated. If the absolute last digit is not a pip then what is the relevance of a 5 digit prising system!?
 

FXProgrammer

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Messages
18
there are "pip" and "point" definitions.
"pip" is equal to 0.0001 price change for non-JPY pairs and 0.01 price change for JPY paris.
Also there is "point" which is the smallest price change of the currencly pair.
For 5-digits brokers point is equal to 0.00001 price change for non-JPY pairs and 0.001 price change for JPY paris.
so for 5-digits brokers point is like a pip fraction.
For 4-digits brokers point is equal to 0.0001 price change for non-JPY pairs and 0.01 price change for JPY paris.
so for 4-digirs brokers point is equal to pip

Profit and spread values are usually shown in points (not pips) so you will see different numbers for 5-digits and 4-digits brokers when the price difference will be equal

P.S. This is how I understand the difference between pip and poing, please correct me if I'm wrong
 

Pharaoh

Colonel
Messages
19,729
Another way to think of it is like this:

For xxxUSD pairs, if you trade a full lot, a 1 pip move makes or costs you $10. A 1/10 pip move (only available at 5 digit brokers) makes or costs you $1.

Anyone want to take a wager on how long it will be before some broker offers 6 digit pricing?
 

Rasfi

Private
Messages
16
Thanks every one, all clear now. Mini, Micro next is 6 digit Nano pricing I suppose, the real question is when are the brokers going to introduce Planck prising system. (the smallest possible length/movement or the absolute limit how far you can go), when they introduce Planck prising system I guaranty you 100% that that will be the last digit they can possibly add to their prising system.
 
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