# Pips and Spreads

## Why is it Important to Know What Pips and Spreads Are?

Pips are important as they define the loss or the win of a trade. Ask any trader the profit he’s made, and you’ll get an answer in real money; but if you ask about a loss, you’ll hear it defined in pips. Spreads, on the other hand, are associated with the cost of trading a specific currency pair. They are insignificant for some currency pairs, but quite big on some others; and on top of that, they vary based on both the time during the trading day and the moment an important of economic data is released.

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### What is a Pip?

A pip is defined as the difference between the ask price (the price at which one can buy a currency pair) and the bid price (the price at which a currency pair can be sold), and it gives the profit or loss of any given trade. To continue with the same example as the one used in the previous two articles here on the Trading Academy, the EUR/USD short position was initiated at 1.07458, and now yields a profit of 93 USD before other costs associated with the trade. The image below shows how the trade moved since its opening.

As can be seen, the 93 USD profit corresponds to a value of 1.07272 (the ask price for the EUR/USD pair on the top left of the chart). This would be the price used to square the trade, as the short position would be squared with a long one. In other words, if the trader decides to take this profit and not to wait for either the stop loss or the take profit order to be hit, the 93 USD profit will be translated into the equivalent number of pips. This equates with the entry price (which was the bid price when the trade was taken) and the close price (the ask price when the trade is closed), or 1.07458 and 1.07272. One needs to be very careful here, though. A pip refers, at least in the case of the EUR/USD (but for many other currency pairs as well), to the fourth digit in the quote!

### What are Spreads?

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#### Recommended Further Reading

• Financial Products to Trade
– Different categories of financial products that a Forex Broker offers for its retail clients, starting with the classical currency pairs, and continuing with commodities, CFDs, indexes, etc.
• Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
• Forex Brokers Types – ECN or STP?
What is ECN? STP? How brokers deal with clients’ orders; and advantages and disadvantages of the two types.
• Opening a Live Trading Account
– Steps in opening a live trading account with a Forex broker, starting with the time taken for the whole process, documentation to be sent, verification process, trading platforms to download, etc.

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