Every time you open a Forex trade, you immediately lose money. Not because you made a bad call — because of the spread. Understanding pips and spreads is not optional background knowledge. It is the arithmetic that determines whether a trading strategy is even viable before a single trade is placed.
A pip is the smallest standard price move in a currency pair — typically the fourth decimal place (0.0001) for most pairs. The spread is the difference between the buy (ask) and sell (bid) price — your broker's fee, paid the moment you enter any trade.
Calculating pips
EUR/USD moves from 1.0850 to 1.0900:
1.0900 − 1.0850 = 0.0050 = 50 pips
USD/JPY (2-decimal pair) moves from 149.50 to 150.00:
150.00 − 149.50 = 0.50 = 50 pips (1 pip = 0.01 for JPY pairs)
Pip value by lot size
| Lot Type | Size | EUR/USD Pip Value |
|---|---|---|
| Standard | 100,000 units | $10/pip |
| Mini | 10,000 units | $1/pip |
| Micro | 1,000 units | $0.10/pip |
The spread — your real entry cost
EUR/USD: Bid 1.0849 / Ask 1.0851 → Spread = 2 pips
You BUY at the ask (1.0851). You SELL at the bid (1.0849). The moment you buy, you are 2 pips in the red. Price must move 2 pips in your direction just to break even.
Spread impact on a scalping strategy:
Strategy targets 10 pips profit per trade. Broker A charges 3-pip spread. Broker B charges 0.2-pip spread.
- Broker A: net gain per win = 10 − 3 = 7 pips. Need 30% win rate to cover spread alone.
- Broker B: net gain per win = 10 − 0.2 = 9.8 pips. Need 2% win rate to cover spread alone.
Over 500 trades, the difference in spread costs alone is enormous. Broker selection is strategy selection.
NGX parallel: Every NGX stock has a bid-ask spread. MTNN might show Bid ₦220.00 / Ask ₦220.50. If you buy at market, you are immediately ₦0.50 behind. On illiquid mid-caps the spread widens to ₦2–5, making short-term trading expensive. Savvy NGX traders use limit orders to buy at the bid rather than the ask, reducing their spread cost.
Comparing brokers only on commission without checking spreads. A "zero commission" broker charging 3 pips on EUR/USD is 10–15x more expensive per trade than a commission-charging broker with 0.2-pip spread. Always calculate total round-trip cost: spread + commission.
During major news events (NFP, Fed rate decisions, CBN MPC), spreads widen dramatically — sometimes 10–20x normal. A 0.3-pip EUR/USD spread can hit 5 pips during a Fed announcement. Avoid entering new positions in the 5 minutes before and after high-impact news.
Every trade starts with the spread as an immediate cost — choosing a tight-spread broker and timing entries away from news events compounds into significant savings across thousands of trades.
