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FX Spreads Explained

Discussion in 'Beginners Bootcamp' started by Rasfi, Nov 12, 2012.

  1. Rasfi

    Rasfi Private

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    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?
     
  2. Pharaoh

    Pharaoh Colonel

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    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.
     
  3. Rasfi

    Rasfi Private

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    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!?
     
  4. FXProgrammer

    FXProgrammer Private

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    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
     
  5. Pharaoh

    Pharaoh Colonel

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    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?
     
  6. Rasfi

    Rasfi Private

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    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.
     
  7. Pharaoh

    Pharaoh Colonel

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    I think some brokers already have Heisenberg uncertainty pricing. :p
     
  8. Rasfi

    Rasfi Private

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    That made my day!:cool: I hate Heisenberg uncertainty pricing system only for the client! lol
     

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