Useful Forex terms

About Spread, PIP, value of one PIP and Lot

What is Spread?

Spread (or range) is the difference between the buying and selling price of a currency pair, as is the case with conventional currency exchanges. If you’ve ever wondered what Forex brokers are earning, here’s the answer. Let’s say the broker pays 1,12150 for the EURUSD currency pair. The spread that the broker will offer you could therefore be 1.12140 for the sale and 1.12160 for the purchase. So many investors choose brokers with the slightest spread. An example might be sportsbooks that are often chosen by the bettors according to the best odds. The best spreads brokers can be found among our reviews.

What is PIP?

PIP is also called a point, and this is the smallest possible value of the currency pair price movement. Thus, if the value of the asset shifted from 1.1300 to 1.1305, it is five PIPS.

How is the value of one PIP calculated?

Let’s show it on examples of two currency pairs EURUSD and USDJPY.

First example: EURUSD
Market price is 1.23390
Value of the investment – 10,000 Eur
Calculation: 0.00001 / 1.23390 x 10,000 EUR is 0.088 EUR is the value of 1 PIP

Second example USD JPY
Market price is 111.991
Value of the investment is 5,000 USD
Calculation: 0.01 / 111.991 x 5000 USD is 0.42 USD is the value of 1 PIP.

What is Lot?

LOT is the smallest quantity in which we buy a given currency pair. Nowadays it’s 1000 currency units also called Micro Lot. We also distinguish Mini Lot of 10,000 Units and Standard Lot of 100,000 Units, but these terms are not so important for our purposes. However, it is important to remember that 1000 units are the minimum we trade with, and any larger quantity must always be divisible by 1000. For example, 5000 units, 10,000 units, 100,000 units …

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