Every forex quote you’ll ever see is built from two numbers that determine what you’re actually paying to trade.
Pips and spreads get explained badly more often than almost anything else in forex education — usually as abstract definitions with no context for why they matter. Here’s the practical version.
What a Pip Actually Is
The smallest standard unit of price movement in a currency pair.
For most pairs, a pip is the fourth decimal place — EUR/USD moving from 1.0850 to 1.0851 is a one-pip move. Yen pairs are the exception, measured to the second decimal place instead of the fourth, because of how the yen is quoted relative to other currencies. Pips are how traders talk about price movement in a standardized way, regardless of which pair they’re looking at.
What a Spread Actually Is
The gap between the buy price and the sell price, and it’s the cost of entering a trade before it’s even moved.
Every quote has two prices: the bid (what you can sell at) and the ask (what you can buy at). The difference between them is the spread, and it’s effectively the built-in transaction cost of the trade — the moment you enter a position, you’re already down the spread amount before price has moved at all. Major pairs like EUR/USD typically have tight spreads because of high liquidity; exotic pairs have wider ones for the opposite reason.
Fixed vs. Variable Spreads
One stays constant regardless of market conditions, the other moves with liquidity.
A fixed spread stays the same regardless of market volatility, which offers predictability but isn’t always the tightest option available. A variable (or floating) spread widens and narrows with market liquidity — it can be tighter than a fixed spread during calm conditions, but can widen sharply during high-impact news events when liquidity temporarily dries up. Neither is universally better; it depends on your trading style and how much predictability you value versus potentially lower average costs.
Why This Actually Matters to Your Results
Spread cost adds up fast for anyone trading frequently, in a way that’s easy to underestimate.
A trader making a handful of trades a month barely notices spread cost. A trader making dozens of trades a week is paying that cost every single time, and it compounds. This is exactly why frequent traders tend to care disproportionately about tight spreads, while longer-term position traders often don’t prioritize it as heavily — the trading style should drive how much weight you put on this factor.
Putting the Numbers Together
A tight spread on a highly liquid pair is the cheapest way to test a new strategy.
When you’re testing a new strategy or getting comfortable with a platform, trading a major pair with a tight spread keeps your real transaction costs low while you’re still learning. It’s worth checking a broker’s actual spreads on the pairs you plan to trade, on a demo account, before committing real funds.
See our full AvaTrade review for more on platforms and account types.
Risk Warning: Trading forex and CFDs involves significant risk of loss and is not suitable for all investors. This is general information, not personalized financial advice. Always ensure you understand the risks before trading, and only trade with capital you can afford to lose.