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PIP Values and Spreads
A pip is the smallest amount that a currency value can change. If the value of the EUR/USD changes from 1.0126 to 1.0131, we say it has gone up 5 pips. Pips are basically the same thing as ticks in commodity futures. Other name of pips is called points.
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.
The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price in which you the trader will sell.
The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price in which you the trader will buy.
The difference between the bid and the ask price is popularly know as the spread.
The bid and ask will be changing from moment to moment as you watch the live action on a dealer platform that is connected to a live data feed, but they will always be separated by the amount of the spread.
If you were to enter a trade and then change your mind and instantly exit the trade before any changes had occurred in the bid and ask prices, the spread would be the cost of your brief trade. Most forex dealers do not charge a commission; hence this spread is how they make their money. Spread vary, from 3 for the highest volume currencies with the biggest market makers, to 6 or even more for cross rates, or when dealing with a small broker.