Pips, Points, Spreads, and Costs: Measuring Movement and Paying for Trading

Pips and Points: The Smallest Measured Moves

In forex, price movement is commonly measured in pips and points. These terms are closely related but can differ depending on how your broker displays prices (especially with fractional pip pricing).

4-decimal pairs (most non-JPY pairs)

• Pip: the 4th decimal place (0.0001). Example: EUR/USD from 1.1050 to 1.1051 = +1 pip.
• Point (often): the smallest quoted increment on a 5-decimal quote (0.00001). Example: 1.10500 to 1.10501 = +1 point = 0.1 pip.

2-decimal pairs (JPY pairs)

• Pip: the 2nd decimal place (0.01). Example: USD/JPY from 145.20 to 145.21 = +1 pip.
• Point (often): the smallest quoted increment on a 3-decimal quote (0.001). Example: 145.200 to 145.201 = +1 point = 0.1 pip.

Fractional pip pricing (pipettes)

Many brokers quote an extra digit beyond the pip (5 decimals for most pairs, 3 decimals for JPY pairs). This extra digit is a fractional pip (often called a pipette):

• For 4-decimal pairs: 1 pip = 10 fractional pips (10 points if your platform calls them points).
• For JPY pairs: 1 pip = 10 fractional pips.

Example: If EUR/USD moves from 1.10520 to 1.10535, that is 0.00015 = 1.5 pips (or 15 fractional pips).

Pip Value: Turning Price Movement into Money

A pip is a price unit; pip value converts that unit into your account currency (often USD). Pip value changes mainly because of lot size and whether the quote currency matches your account currency.

Lot sizes (common)

• Standard lot: 100,000 units of base currency
• Mini lot: 10,000 units
• Micro lot: 1,000 units

Step-by-step: pip value when your account currency equals the quote currency

This is the simplest case (e.g., USD account trading EUR/USD, GBP/USD, AUD/USD). For 4-decimal pairs:

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Pip Value = Lot Size × 0.0001 (in quote currency)

Example (EUR/USD, USD account):

• Standard lot: 100,000 × 0.0001 = $10 per pip
• Mini lot: 10,000 × 0.0001 = $1 per pip
• Micro lot: 1,000 × 0.0001 = $0.10 per pip

For JPY pairs (2-decimal pip):

Pip Value (in JPY) = Lot Size × 0.01

Then you convert JPY to your account currency if needed.

Step-by-step: pip value when your account currency is NOT the quote currency

When the quote currency is not your account currency, you convert the pip value using the relevant exchange rate. A practical approach is:

1. Compute pip value in the quote currency.
2. Convert that amount into your account currency using the current rate.

General formula (account currency = A, pair = X/Y):

Pip Value (in A) = (Lot Size × Pip Size) × (Conversion rate from Y to A)

Example 1: USD account trading EUR/GBP (quote currency = GBP)

• Assume 1 lot (100,000), pip size 0.0001
• Pip value in GBP = 100,000 × 0.0001 = 10 GBP per pip
• If GBP/USD = 1.2500, then 10 GBP ≈ $12.50 per pip

Example 2: USD account trading USD/JPY (quote currency = JPY)

• Assume 1 lot (100,000), pip size 0.01
• Pip value in JPY = 100,000 × 0.01 = 1,000 JPY per pip
• If USD/JPY = 145.00, then 1,000 JPY ≈ 1,000 / 145 = $6.90 per pip (approx.)

Why pip value changes (pair selection + lot size)

• Lot size: doubles the lot size, doubles the pip value (linear relationship).
• Pair selection: pip value depends on the quote currency and the conversion rate into your account currency. For example, a pip on EUR/USD is often near $10 per standard lot, while a pip on USD/JPY varies with the USD/JPY rate.
• Price changes: for pairs requiring conversion, pip value can fluctuate as exchange rates move (especially noticeable on JPY pairs and crosses).

Bid, Ask, and Spread: The Built-in Transaction Cost

Every forex quote has two prices:

• Bid: the price at which you can sell.
• Ask: the price at which you can buy.

The spread is the difference:

Spread = Ask − Bid

Example (EUR/USD): Bid 1.10520, Ask 1.10530 → Spread = 0.00010 = 1.0 pip.

Why spread is a cost

If you buy, you enter at the ask. If you immediately closed the position, you would sell at the bid. That gap is the spread cost. In practice, your trade must move in your favor by at least the spread (plus any commissions) to break even.

Trade Cost and Break-even: Spread and Commissions Together

Step-by-step: cost from spread (in money)

Spread Cost = Spread (in pips) × Pip Value

Example: EUR/USD, 1 standard lot, pip value ≈ $10/pip, spread = 1.2 pips

• Spread cost = 1.2 × $10 = $12

Adding commissions

Some accounts charge a separate commission (often quoted as “$X per lot per side” or “$X round-turn”). You include commissions in break-even.

• Per side: charged on entry and on exit.
• Round-turn: total for entry + exit.

Step-by-step: break-even distance in pips

Break-even (pips) = Spread (pips) + (Round-turn Commission ÷ Pip Value)

Example: EUR/USD, 1 standard lot ($10/pip), spread = 0.2 pips, commission = $7 round-turn

• Commission in pips = $7 ÷ $10 = 0.7 pips
• Break-even = 0.2 + 0.7 = 0.9 pips

Example (smaller size): EUR/USD, 1 mini lot ($1/pip), spread = 0.2 pips, commission = $0.70 round-turn (scaled)

• Commission in pips = $0.70 ÷ $1 = 0.7 pips
• Break-even remains 0.9 pips if commission scales proportionally with size.

Note: Some brokers have minimum commissions or different scaling; always verify how commissions apply to your trade size.

Common Pricing Models: Spread-only vs Raw Spread + Commission

How to compare accounts using an “all-in cost”

Convert everything to pips for the same pair and lot size:

All-in Cost (pips) = Spread (pips) + (Round-turn Commission ÷ Pip Value)

Example comparison (EUR/USD, 1 standard lot):

• Spread-only account: 1.1 pips, no commission → all-in = 1.1 pips
• Raw+commission account: 0.2 pips + $7 round-turn → 0.2 + 0.7 = 0.9 pips

In this example, the raw+commission model is cheaper by 0.2 pips ($2 per standard lot trade). Whether that matters depends on how often you trade and your average target size.

When Spreads Widen (and Why It Matters)

Spreads are not always fixed. They often widen when liquidity is lower or uncertainty is higher. Wider spreads increase your break-even distance and can trigger stops more easily.

Common conditions that widen spreads

• Illiquidity: fewer active buyers/sellers (often in off-hours for a given pair).
• Major news releases: economic data, central bank decisions, unexpected headlines; quotes can gap and liquidity providers protect themselves by widening spreads.
• Market open/close transitions: especially the weekly open and around session handovers; pricing can be less stable.

Practical checklist before placing a trade

• Check the current spread versus the pair’s usual spread.
• Estimate your all-in cost (spread + commission in pips).
• Confirm your strategy’s typical move size comfortably exceeds break-even (e.g., targeting 5 pips with a 2-pip all-in cost is structurally difficult).

Mini-Exercises (with space to calculate)

Exercise 1: Calculate trade cost from spread

Scenario: You trade 0.50 lots of EUR/USD on a spread-only account. The spread is 1.4 pips. Assume pip value for 1.00 lot is $10/pip.

• Step 1: Pip value for 0.50 lots = $10 × 0.50 = $____ per pip
• Step 2: Spread cost = 1.4 × (pip value) = $____

Exercise 2: Estimate break-even distance (spread + commission)

Scenario: You trade 1.00 lot of GBP/USD on a raw+commission account. Spread is 0.3 pips. Commission is $6 round-turn. Assume pip value is $10/pip.

• Commission in pips = 6 ÷ 10 = ____ pips
• Break-even = 0.3 + ____ = ____ pips

Exercise 3: Identify conditions that widen spreads

Question: For each situation, mark whether spreads are likely to be Normal or Wider.

• Trading a major pair during the most active overlap hours: Normal / Wider
• Trading right before a major central bank rate decision: Normal / Wider
• Trading a cross pair during a quiet period with low volume: Normal / Wider
• Trading at the weekly market open: Normal / Wider