Pips & Spreads: What Every Trade Actually Costs You
SohaFX Learning
April 2025 · 4 min read
Most beginners don't calculate spread costs until it's too late. This guide shows you exactly how to factor the real cost of every trade before you click buy.
Here's an uncomfortable truth: every single time you open a trade in forex, you start at a loss. That loss is the spread — the difference between the price you can buy at and the price you can sell at. Understanding this isn't discouraging; it's essential.
What Is a Pip?
A pip stands for 'Percentage in Point' — it's the smallest standard unit of price movement in forex. For most currency pairs, 1 pip = 0.0001 (the fourth decimal place).
Pip example
- ›EUR/USD moves from 1.0842 to 1.0850
- ›Difference = 0.0008 = 8 pips
- ›JPY pairs are different: 1 pip = 0.01 (second decimal place)
- ›USD/JPY moves from 149.62 to 149.72 = 10 pips
What About Pipettes?
Many modern brokers quote prices to 5 decimal places (e.g. 1.08423). The fifth decimal is a pipette — one-tenth of a pip. It's a finer level of precision, but the 4th decimal (the pip) is what you'll hear most often in discussion.
What Is the Spread?
Every currency pair has two prices: the bid (what you sell at) and the ask (what you buy at). The spread is the gap between them — and it's how most brokers make their money.
| Bid (sell) | Ask (buy) | Spread | |
|---|---|---|---|
| EUR/USD | 1.08400 | 1.08420 | 2.0 pips |
| GBP/USD | 1.27340 | 1.27370 | 3.0 pips |
| USD/JPY | 149.620 | 149.645 | 2.5 pips |
The moment you open a trade, you're immediately at a loss equal to the spread. Your trade needs to move that many pips in your favour just to break even. This is why tighter spreads matter enormously, especially for short-term traders.
The Real Cost in Dollars
The pip value depends on your lot size:
| Lot Type | Units | Pip Value (USD pairs) |
|---|---|---|
| Standard | 100,000 | $10 per pip |
| Mini | 10,000 | $1 per pip |
| Micro | 1,000 | $0.10 per pip |
Real spread cost example
- ›You trade 1 mini lot (10,000 units) of EUR/USD
- ›Broker spread = 2 pips
- ›Cost = 2 pips × $1 per pip = $2 immediately lost on entry
- ›For 10 trades per day: $20/day in spread costs
- ›For 200 trading days/year: $4,000/year just in spread
Fixed vs Variable Spreads
Fixed spreads stay constant regardless of market conditions. Good for knowing your costs in advance. Variable (floating) spreads change based on liquidity — they narrow during active sessions and widen sharply during news events or off-hours.
For beginners, variable spreads are generally better during peak hours (you get tighter spreads), but you must be careful around news releases — your effective spread can jump from 1 pip to 20+ pips in seconds.
How to Choose a Broker Based on Spreads
- Compare EUR/USD spreads during the London–New York overlap (most representative)
- Watch out for 0-pip spreads — the commission is usually hidden elsewhere
- ECN brokers typically offer tighter spreads + a small per-trade commission (often cheaper overall for active traders)
- Avoid brokers with spreads above 3 pips on EUR/USD during normal hours
The takeaway: Before placing any trade, calculate your spread cost, add it to your stop-loss distance, and make sure your take-profit target still delivers a good risk-to-reward ratio. If a 3-pip spread eats 30% of your 10-pip stop, that trade probably isn't worth taking.
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