Trading CFDs involves a significant risk of loss that may not be suitable for all investors. Please ensure you fully understand the risks and take appropriate care to manage your exposure.

Trading CFDs involves a significant risk of loss that may not be suitable for all investors. Please ensure you fully understand the risks and take appropriate care to manage your exposure.

# Pips and Spreads in Currency

This article will explain in a simple way the concepts of pips and spreads concerning foreign exchange. Remember that when an asset is referenced, the subject will always be a currency pair. A broker sells assets to traders and also buys them. A spread is the price difference between what a broker sells an asset at, and what a broker is willing to pay to buy that same asset. The value of most currency pairs are measured up to the fourth decimal point. A pip represents the smallest movement in the pair, meaning 1/100th of one percent or a single tick of that last decimal. They can also be called basis points. When discussing Currency with a fellow trader, a universal knowledge of what pips, spreads and other important terms refer to means that complicated financial concepts can be understood with ease. This is key to the efficient absorption of information that will aid you in brisk trading. These terms also populate most market news articles and analysis pieces published today. This is why any beginner who is looking to become serious must strive to understand Currency vocabularies.

## What is a pip?

A pip is 0.0001 of the underlying asset. Why 0.0001? Because currency pairs and similar instruments are measured down to this decimal point. Changes in value are measured at this decimal level and represent the smallest possible increment in movement.

## Measuring movements in Pips

Pip value = (one pip / exchange rate) * lot size

Note that this value may change depending on which currency your trading account is denominated in, or whether or not you need to apply the exchange rate to see the value of your return in your home country’s currency.

## Pip Calculator

Pip calculation example 1: We calculate the value of one pip in Euros, for one lot of EURUSD at a price of 1.1140. The calculation would be:

(0.0001 / 1.1140) * 100,000 = €8.98 per pip

If we want calculate the value in USD, we do not need the exchange rate: it would instead read as (0.0001 * lot size).

0.0001 * 100,000 = \$10 per pip

Pip calculation example 2: We calculate the value of one pip in US dollars, for one lot of USDJPY at 117.0804. The calculation would be:

/ 117.0804) * 100,000 = \$8.54 per pip

By learning and retaining a knowledge of how pips and spreads work alongside other important trading vocabulary, traders are able to react faster to good opportunities and more easily analyze exact profit and loss values. Take your time to study a live example in the market now.