A pip stands for
percentage in point and on most currencies it represents the unit for
the change in the quote to the fourth decimal point. For example if
EUR/USD goes up from 1.1914 to 1.1920, then the change is 6 pips up.
There are two basic orders in forex: BUY or a long order and SELL
a short order. Here are two examples to illustrate this:
If the buy price for EUR/USD = 1.1914 and the sell price is 1.1917, the
spread is 3 pips.
There are 2 different
kinds of spread: floating and fixed. Fixed spread
is always constant so the broker gives the same spread on the given
instrument at any time. This is suitable for traders who are more
interested in fundamental analysis and news trading as it offers the
same reasonable spread while trading even when big news and events
break out.
Floating spread continuously changes as supply and demand change. This
insures much better spreads for traders at most times and it can go as
low as 0 pips. However, the floating spread is highly affected by major
economic news and events while fixed spread remains constant at all
times.
Please note that the Japanese Yen (JPY) is an exception when it comes
to spread and prices as it is quoted only to the second decimal point.