PAY THE SPREAD

PAY THE SPREAD
Forex prices, or quotes, include a bid and an ask, similar to other financial
products. The bid is the price at which a dealer is willing to buy and traders
can sell a currency. The ask is the price at which a dealer is willing to sell
and traders can buy a currency. In forex trading, unlike futures or equities,
one has to pay a PIP (percentage in points) spread on entering and on exiting
a trade. The PIP spread is the point difference between the bid and the
asking price of the spot currency price. This can vary between two and six
PIPs, depending on the volume and the popularity of the cross currency.
A typical example is the euro (EUR) versus the U.S. dollar (USD). We
will see a bid price on the EUR/USD of 1.2630 and an asking price of 1.2633,
which means you are paying a three-PIP spread. The spread essentially
works like this. You place a buy on the EUR/USD at 1.2633, but you won’t
see breakeven on the trade until the price moves to 1.2633 bid. If you are
trading a mini-account, you will see a $3.00 deduction for your trade profit
on entry. Once the price moves to 1.2633 bid, then your account comes out
of the red and into the black. In an exotic cross such as the euro versus
against the Japanese yen or the New Zealand dollar versus the Japanese
yen, you might pay a higher bid-ask spread of 6 to 12 PIPs. You need to
check with your forex dealer for the listing of PIP spreads per preset
crosses and pairs trades.