Forex Glossary: Pips and Spread

Two terms show up in almost every forex conversation, and if nobody ever actually explained them to you, half of what traders say probably sounds like a foreign language. So let's fix that. Here's what a pip is, what the spread is, and why the two of them together determine what a trade actually costs you.

What a Pip Actually Is

A pip is the smallest standard price movement in forex.

For most currency pairs — like EUR/USD — a pip is the fourth decimal place. So if EUR/USD moves from 1.0850 to 1.0851, that's one pip.

That's it. One unit of movement.

Now why does this matter? Because everything in forex is measured in pips. Your stop loss is X pips away. Your target is Y pips away. Your risk-reward is calculated in pips. Your profit and loss at the end of the day? Pips.

And here's where it gets a little more real — the actual dollar value of a pip depends on your lot size. On a standard lot, one pip is worth about $10. On a mini lot it's $1. On a micro lot it's 10 cents.

So when someone says they made 50 pips today, that could mean $500 or it could mean $5 depending on how they were sized.

This is why you can't just chase pip counts. Context matters. How much did you risk to make those 50 pips? That's the real question.

Pips measure movement. Your position size determines what that movement is actually worth to your account.

Bid vs Ask: The Spread

Every time you look at a forex quote you're actually seeing two prices — the bid and the ask. And the difference between them is called the spread.

The bid is the price the market will buy from you — it's what you get when you sell. The ask is the price the market will sell to you — it's what you pay when you buy. The ask is always slightly higher than the bid.

So let's say EUR/USD shows 1.0850 bid and 1.0852 ask. The spread is 2 pips. The moment you enter a trade you're already starting 2 pips in the hole. That's the cost of the trade.

Brokers make their money on the spread. That's how they get paid. No commission — just that tiny gap between buy and sell.

Why does this matter to you? Because it affects your actual entry and your breakeven point. If your spread is 2 pips and your stop is 10 pips away, you're not risking 10 pips. You're risking 12.

It also means tight spreads matter. Especially if you're trading shorter timeframes where those extra pips add up fast.

Know your spread before you trade. It's not a big number, but it's not invisible either.

Putting the Two Together

Here's why these two terms live in the same conversation. Pips tell you how much a trade moved. The spread tells you how many of those pips you already owe before the trade even starts.

Say you're trading a micro lot, where a pip is worth 10 cents, and your broker's spread on your pair is 2 pips. That's 20 cents you're down the instant you click buy — small on a micro lot, but the exact same 2-pip spread on a standard lot is $20 gone before price has moved at all. Same spread, wildly different cost, because pip value and spread only mean something once you put them together.

That's the real lesson here. Neither number tells you much on its own. A pip without knowing your lot size is just an abstract tick on a chart. A spread without knowing your pip value is just "2 pips," which sounds tiny until you realize what it's actually costing you at your size. Know both, and you actually know what a trade costs before you're in it — not after.