Everything you need to know about Pips and Spreads

by admin on February 21, 2010
in Forex Trading Online

Forex trading is exciting, it’s challenging and it has the potential to earn you large sums of revenue.  Now, if you are fairly new to Forex trading, it will not be long before you began to hear the terms ‘Pips’ and ‘Spreads’ thrown around in Forex circles.  For example, when looking for a Forex broker, you will be advised to find a broker with a low spread.   You might also learn that a currency has risen or fallen by a certain number of pips.  These two words are basically used to make it easier to accurately calculate and indicate how much a currency is worth.  Pips and spreads are of importance to both traders and brokers, so it is a good idea to get to grips with what they are as early on as possible in your trading career.
You have probably heard that Forex currency rates fluctuate on a constant basis.  Day and night currencies go up and down, quite quickly sometimes.  This is all part of Forex and it is the characteristic that makes trading Forex a 24 hour a day, 7 day a week endeavor… potentially anyway.  Very often the changes that are seen in currencies are small and subtle.  In fact, rate changes are often so small that they are measured in units that are even smaller than the number one.  Currencies are measured using decimals.  Notice how you usually see currency rates written with a decimal point and then two to four numbers after the decimal point.
Currency rate changes are often so small that they are measured in Pips.  A Pip is an extremely small unit of measurement.  1 Pip basically pans out to be the equivalent of 0.0001.  The smallest possible rate change that can be seen or measured in currencies is the Pip.   Here is an example of pips in a standard currency pair:  USD/EUR is 1.232/1.239.  This figures used in this example have what is known in Forex as a 7-pip spread – they have a spread of 7 pips; the difference between the two figures.
What is a Spread?
The spread is the difference in value between the buy and the sell rate of a currency.  The buy price is at times also called the ‘bid’ and the sell price is also known as the ‘ask’.  The spread is an amount that is set by the market maker.  When you understand Forex at a deeper level, you will learn that it is the market maker that takes the biggest risk in a Forex trade. They make the trade possible and they place that they make their profit is in the spread.   The larger the spread, the more money they make.
There is always a spread or a difference between the buy and sell rates.  New Forex traders often fail to realize that if you purchase a currency and hold it for as little as 5 minutes, and even if it there is no change in the currency rate, that you will still lose money if you sell it.  This is because currencies are never bought and sold at the same price.  Currencies always sell at a lower rate than they are purchased at.

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Forex Brokers – Who They Are?

by admin on January 18, 2010
in Forex Brokers

Forex trading involves the buying and selling of foreign currencies.  Forex investors benefit through Forex only when they manage to sell a currency at a rate higher than what they bought it at.  The fact is, the value of currencies can fluctuate tremendously even within as little space of time as a 24 hour period.  By the same token, they can rise or fall suddenly and for long periods of time too resulting either in a significant loss or a substantial profit. 

What is a Forex Broker?
A Forex broker is an individual that is trained to assist you in the process of buying and selling currencies.  A Forex broker receives your order to buy or sell a currency and they execute it.  It is highly likely that if you make a decision to get involved in Forex trading, you will come to know your Forex Broker fairly well.  Ideally, your Forex broker will be a person that will provide you with support, advice and knowledge on the Forex market.  Also, it is quite important to find a Forex broker that offers a low spread.  A broker’s spread basically determines how much commission you will be charged on each of your trades.  The lower the spread, the better off you will be as a trader.

As you go through the process of finding a Forex Broker, there are a few things that you should look out for.  First of all, your broker should be associated with a major financial institution or association.  This should provide you with security and reliability.  Secondly, the Forex broker should be registered with the Commodity Futures Trading Commission (CFTC).  This is a must!  Once those two things have been established, you can begin to discuss other specifics.  

When you meet with brokers, ask questions to find out what level of support the Broker is willing to provide you as a new trader.  They should be able to provide you with software samples of their trading platform and they should be able to guide you towards good resources and research material that will help you to make informed trading decisions.  

Finding the right broker will take some homework on your part.  If you have friends or associates that trade in Forex, getting some advice from them is ideal.  They may or may not like the broker that they work with.  At minimum, they could give you pointers as to what to look for in a broker and on what has worked for them.

Who Pays the Forex Broker?
Forex brokers make money on every trade that they broker.  It is not a percentage-based commission but rather a built in commission that is derived from the difference between what the seller accepts for the currency and what the buyer pays.  These two prices rarely equal the same amount.  The broker makes his money from the difference.  By choosing a broker with a low spread, you can minimize the amount of commission you pay for the lifetime of that relationship. 

As a newbie in Forex trading, it is important for you to use an established institution for Forex trading.  As you gain experience you may choose to work with other brokerages.  Since almost all Forex trading is done online, you will need to ask your broker for trading platform software.  A good broker will guide you through using their Trading Platform software to ensure that you know how to use it.  If you are to find success with Forex, it is important that you are comfortable with your broker, with the software and that you know exactly how to use it.

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