Here are some key terminology points for beginners that can help you understand some very important things before you get started on your trading journey.
Currency pair quotes and the exchange rates
Forex trading is composed of buying and selling of currencies. The exchange rate of the two currencies is quoted in a pair. If we are looking at EUR/USD, a buy simply means you want to see the euro gain strength over the dollar, where a sell means you see the euro losing strength against the dollar.
Percentage In Points (PIP)
The smallest increment of price movement a currency can make is known as a PIP, or percentage in points. All currency pairs are quoted against each other at 5 digits. As seen in the table below we have EURUSD at an ask price of 1.1088(4) if we are looking at buying the currency. The last digit is a pipette and not very important. If the price was to move up to 1.1089(4) then we would look att he difference between the two. 1.1089 - 1.1088 gives us an increase of 1 pip.
If the price reaches 1.1139 then 1.1139- 1.1088 is a total movement of 51 pips. This is where the money is made, in those pip movements.
The “Bid” is the price a trader pays to sell a particular currency pair.
The “Ask” is the price a trader pays in order to buy the currency pair.
As shown above, a pip is the fourth unit after the decimal point, however this statement doesn’t apply to any Japanese Yen (JPY) pairs. JPY pairs pip count starts at the second unit after the decimal point.
Currencies are traded in pairs, and many are available, some much more liquid than others.
The spread is therefore the difference between the “Bid” and the “Ask” prices. This is measured in pips. This spread is why you will automatically be going into negative as soon as your trade is placed in either direction. This is decided by the broker as a way for them to possibly earn money on the trade. The most liquid and popular pairs usually have the lowest spreads.