Prices, spreads and pips

Trading on margin can lose you more than you put in. Past results, including backtests, do not predict future results. Cloud9Trader provides tools and education, not financial advice. Read the full risk warning.

A broker always shows two prices:

• The bid is the price you can sell at.
• The ask is the price you can buy at.

The ask is higher than the bid. The gap between them is the spread, and it is a cost you pay on every trade: if you buy and immediately sell, you lose the spread.

Price moves are counted in pips. On most currency pairs a pip is 0.0001, the fourth decimal place. On pairs quoted in Japanese yen, such as USD/JPY, a pip is 0.01. Many brokers quote one more decimal place than the pip, so a price like 1.08512 has a fraction of a pip at the end.

A worked example

EUR/USD is quoted at bid 1.08500 and ask 1.08512.

• The spread is 1.08512 − 1.08500 = 0.00012. With a pip size of 0.0001, that is 1.2 pips.
• For a position of 10,000 euros, one pip is worth 10,000 × 0.0001 = 1 US dollar. So the spread costs you 1.20 dollars when you open the position.

USD/JPY is quoted at bid 151.230 and ask 151.245.

• The spread is 0.015. With a pip size of 0.01, that is 1.5 pips.

The spread widens when the market is quiet or moving fast, for example overnight or around news. A strategy that trades often pays the spread often, so it matters most for short-term algorithms.

In Cloud9Trader

In an algorithm, the current prices are BID, ASK and MID (halfway between them), and the spread in pips is SPREAD. The instrument’s pip size is PIP_SIZE and the number of decimal places it is quoted to is PRECISION.

A common use is to skip trading when the spread is too wide, for example if (SPREAD <= maxSpread) { ... }, with maxSpread set as an external.

Read next

• Orders: how a buy or sell turns into a position, and how stop loss and take profit close it.