Wed 28 Oct 2009
how do forex brokers charge traders with pip spreads?
Posted by echan76 under Investing
none g asked:
i know that the less pip spreads a forex broker offers the better. but why? how do they make money by offering more or less pip spreads?
thanks in advance.
i know that the less pip spreads a forex broker offers the better. but why? how do they make money by offering more or less pip spreads?
thanks in advance.
A “pip” is a fraction of a unit of currency. For instance, the current level of the dollar versus the British pound is $1.9671 per pound. The $0.0001 is called a pip. A forex broker will make a quote $1.9670 bid and $1.9672 offered. In this case, the spread is 2 pips (i.e., $0.0002). If you want to buy pounds, you must pay $1.9672 dollars. If you want to sell pounds, you will receive $1.9670.
So, if you trade frequently, you would prefer a narrow spread, like the one above, to a spread of, say, $1.9500 bid and $1.9700 offered. In the latter case, you need the $/pound rate to move a lot just to break even.
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