Forex prices or quotes consist of a “bid” and “ask” price, as in other financial products. While bid is the price at which the dealer buys and the trader sells, ‘ask’ is the price at which the dealer will sell and the trader buys the currency of choice. The difference between the two is known as the “spread”, and the trader’s transaction cost. While the spread is a basic Forex term, new traders get easily confused by the concept and should rely on a good educational Forex source.
The value of the ‘pip’
Currencies are generally quoted to four decimal places. For example, the Euro/USD trades at 1.2400/1.2403. The last decimal place is known as the point or “pip”, the smallest value of the currency pair. For most currencies, the pip is 0.0001 of an exchange rate. If the EUR/USD change is from 1.2400 to 1.2402, the change in pip is 2. The spread used by brokers can vary, be it for one mini lot or manifold standard lots, each time a trade is placed. The spread paid on a standard lot for a 2-pip spread is 20 dollars. When these costs are reduced, trading profits naturally go up.
No loser even with a losing trade
By participating in a rebate program, a trader can receive back a portion of the spread paid for every trade. Such programs are offered by introducing brokers like Forex Trading Pal. This introducing broker offers a high rebate (0.5 pip on each lot traded) and sustains good relationships with well respected brokers.
Let us take the case of a trader with a 10,000-dollar account and an average 30 trades a month. Suppose one standard lot per trade is made, the trader takes home up to 5 dollars per trade. The transaction cost on a 2-pip spread thus works out to 600 dollars. The transaction cost with a 5-dollar rebate works out to 450 dollars, a saving indeed!
It is possible to get a rebate even in a losing trade since it is the overall volume traded and not the amount of winning or losing trades that is relevant to rebates. And now for a word of advice! Before committing to a broker, make sure you have educated yourself about the risks involved. If you have any questions, never hesitate to contact a financial advisor.
